Galvin v SEC

___

ORIGINALUNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUH

V

UNITED STATES SECURITIES ANDCase No.

15-11FO

EXCHANGE COMMISSION,

Respondent.

PETITION FOR REVIEW

Pursuant to Rule 15(a) of the Federal Rules of Appellate Procedure; Section9 of the Securities Act of 1933, 15 U.S.C. 771; and Section 706 of theAdministrative Procedure Act, 5 U.S.C. 701 et seq., petitioner William F.Galvin, Secretary of the Commonwealth of Massachusetts, by his attorney Maura

Healey, Attorney General of the Commonwealth of Massachusetts, hereby

petitions this Court for review of a rule of respondent the United States Securities

and Exchange Commission relating to the preemption of state securities law

registration and qualification requirements for certain Regulation A securities. The

Commission adopted this rule on March 25, 2015. The final rule release, a copy of

VtTIA1Sf. C3ALVIN, SECRETARY OFTHE COMMONWEALTH OFMASSACHUSETTS,

Petitioner,

MAY222rj_I

RECL!i aDMai!1&.rn

United Cotrt of AoejlgDistrict ot ugi*bia ircui

which is attached to this petition, was published in the Federal Register on April

USCA Case #15-1150 Document #1553850 Filed: 05/22/2015 Page 1 of 125

20, 2015. Amendments for Small andAdditional Issues Exemptions Under the

Securities Act (Regulation A), 80 Fed. Reg. 21,806 (Apr. 20, 2015) (to be codified

at 17 C.F.R. parts 200, 230, 232, 239, 240, 249, & 260).

Petitioner submitted written comments on the proposed rule on December

18, 2013 and March 24, 2014. Petitioner now asks this Court to hold the

Commissions rule arbitrary, capricious, and otherwise not in accordance with the

Administrative Procedure Act, the Securities Act of 1933, and other law.

Petitioner requests vacatur of the rule and its requirements, issuance of a

permanent injunction prohibiting the Commission from implementing andenforcing the rule, and such other relief as the Court deems appropriate.

Respectfully submitted,

MAURA HEALEYAttorney General of Massachusetts

(),

/

By:Seth Schofield /

D.C. Circuit Bar Roll No. 55725Robert E. TooneSookyoung ShinAssistant Attorneys GeneralOne Ashburton PlaceBoston, MA 02108-1598(617) 727-2200seth. [email protected]

Counselfor William F. Galvin, Secretaryofthe Commonwealth ofMassachusetts

Date: May21, 2015

2


ATTACHMENT

United States Securities and Exchange Commission

Amendments for Small and Additional Issues ExemptionsUnder the Securities Act (Regulation A), Final Rule

80 Fed. Reg. 21,806(Published April 20, 2015; Effective June 29, 2015)


FEDERAL REGISTERVol. 80 Monday,No. 75 April 20, 2015

Part II

SecurWes and Exchange Commission17CFR Parts 200, 230, 232, et al.Amendments for Small and Additional Issues Exemptions Under theSecurities Act (Regulation A); Final Rule


21806 Federal Register/Vol. 80, No. 75/Monday, April 20, 2015 /Rules and Regulations

SECURITIES AND EXCHANGECOMMISSION

17 CFR Parts 200, 230, 232, 239, 240,249, and 260[Release Nos. 339741; 3474578; 392501;File No. S71 11 3]RIN 3235AL39

Amendments for Small and AdditionalIssues Exemptions Under theSecurities Act (Regulation A)AGENCY: Securities and ExchangeCommission.ACTION: Final rules.

SUMMARY: We are adopting amendmentsto Regulation A and other rules andforms to implement Section 401 of theJumpstart Our Business Startups (JOBS)Act. Section 401 of the JOBS Act addedSection 3(b)(2) to the Securities Act of1933, which directs the Commission toadopt rules exempting from theregistration requirements of theSecurities Act offerings of up to $50million of securities annually. The finalrules include issuer eligibilityrequirements, content and filingrequirements for offering statements,and ongoing reporting requirements forissuers in Regulation A offerings.DATES; The final rules and formamendments are effective on June 19,2015.

FOR FURTHER INFORMATION CONTACT:Zachary 0. Faflon, Special Counsel;Office of Small Business Policy,Division of Corporation Finance, at(202) 5513460; or Shehzad K. Niazi,Special Counsel; Office of Rulemaking,Division of Corporation Finance, at(202) 5513430, U.S. Securities andExchange Commission, 100 F Street NE.,Washington, DC 205493628.SUPPLEMENTARY INFORMATION: We areamending Rules 251 through 263 ofRegulation A under the Securities Act of1933 (the Securities Act).2

We are revising Form 1A,3rescinding Form 2A,4 and adoptingfour new forms, Form 1K (annualreport), Form 1SA (semiannual report),Form 1U (current report), and Form1Z (exit report).

Further, we are revising Rule 4a1under the Trust Indenture Act of 1939(the Trust Indenture Act) 6 to increasethe dollar ceiling of the exemption fromthe requirement to issue securities

17 CFR 230.251 through 230.263.215 U.S.C. 77a et seq.17 CFR 239.90.17 CFR 239.91.17 CVR 260.4a1.615 u.S.c. 77aaa et seq.

pursuant to an indenture. We are alsoamending Rule 12g51 of theSecurities Exchange Act of 1934 (theExchange Act) to permit issuers torely on a conditional exemption frommandatory registration of a class ofsecurities under Section 12(g) of theExchange Act, Rule 15c211 of theExchange Act to permit an issuersongoing reports filed under RegulationA to satisfy a broker-dealers obligationsto review and maintain certaininformation about an issuers quotedsecurities, and Rule 301 10 of theCommissions organizational rules andprovisions for delegated authority topermit the Division of CorporationFinance to issue notices of qualificationand deny Form iZ filings. In addition,we are adopting a technical amendmentto Exchange Act Rule 15c211 to updatethe outdated reference to Schedule Hof the By-Laws of the NationalAssociation of Securities Dealers, Inc.,which is now known as the FinancialIndustry Regulatory Authority, Inc.and to reflect the correct rule reference.

As a result of the revisions toRegulation A, we are adoptingconforming and technical amendmentsto Securities Act Rules 157(a),h1505(b)(2)(iii),12 and Form 8A.Additionally, we are revising Item101(a) 13 of Regulation ST to reflectthe mandatory electronic filing of allissuer initial filing and ongoingreporting requirements underRegulation A. We are also revising Item101(c)(6) of Regulation ST to removethe reference to paper filings in aRegulation A offering, and removingand reserving Item ioi(b)(8) 16 ofRegulation ST dealing with theoptional electronic filing of Form FXby Canadian issuers.Table of ContentsI. IntroductionII. Final Rules and Amendments to

Regulation AA. OverviewB. Scope of Exemption1. Eligible Issuers2. Eligible Securities3. Offering Limitations and Secondary

Sales4. Investment Limitation5. Integration6. Treatment Under Section 12(g)C. Offering Statement

17 CFR 240.12g51.815 U.S.C. 78a et seq.17 CFR 240.15c211. 17 CFR 200.301.1117 CFR 230.157(a).1217 CFR 230.505(b)(2)(iii).1317 CFR 232.101(a).1417 CFR 232.10 et seq.15 17 CFR 232.101(c)(6).1617 CFR 232.101(b)(8).

1. Electronic filing; Delivery Requirements2. Non-Public Submission of Draft Offering

Statements3. Form and Content4. Continuous or Delayed Offerings and

Offering Circular Supplements5. QualificationD. Solicitation of Interest (Testing the

Waters)1. Proposed Rules2. Comments on Proposed Rules3. Final RulesE. Ongoing Reporting1. Continuing Disclosure Obligations2. Exchange Act Rule 15c211 and Other

Implications of Ongoing ReportingUnder Regulation A

3. Exchange Act Registration of RegulationA Securities

4. Exit Report on Form 1ZF. Insignificant Deviations From a Term,

Condition or RequirementG. Bad Actor Disqualification1. Proposed Rules2. Comments on Proposed Rules3. Final Ru)esH. Relationship With State Securities Law1. Proposed Rules2. Comments on Proposed Rules3. Final RulesI. Additional Considerations Related to

Smaller OfferingsJ. Transitional Guidance for Issuers

Currently Conducting Regulation AOfferings

K. Technical and Conforming AmendmentsIll. Economic Analysis

A. Broad Economic ConsiderationsB. Baseline1. Current Methods of Raising Up to $50

Million of Capital2. Investors3. Financial IntermediariesC. Scope of Exemption1. Eligible Issuers2. Eligible Securities3. Offering Limitations and Secondary

Sales4. Investment Limitation5. Integration6. Treatment Under Section 12(g)D. Offering Statement1. Electronic Filing and Delivery2. Disclosure Format and Content3. Audited Financial Statements4. Other Accounting Requirements5. Continuous and Delayed Offerings6. Nonpublic Review of Draft Offering

StatementsE. Solicitation of Interest (Testing the

Waters)F. Ongoing Reporting1. Periodic and Current Event Reporting

Requirements2. Termination and Suspension of

Reporting and Exit Reports3. Exchange Act RegistrationG. Insignificant DeviationsH. Bad Actor DisqualificationI. Relationship With State Securities Law

IV. Paperwork Reduction ActA. BackgroundB. Estimated Number of Regulation A

OfferingsC. PRA Reporting and Cost Burden

Estimates


Federal Register/Vol. 80, No. 75/Monday, April 20, 2015 /Rules and Regulations 21807

1. Regulation A (Form 1A and Form 2A)2. Form 1K: Annual Report3. Form 1SA: Semiannual Report4. Form 1U: Current Reporting5. Form 1Z: Exit Report6. Form 8A: Short Form Registration

Under the Exchange Act7. Form ID Filings8. Form FXB. Collections of Information Are

MandatoryV. Final Regulatory Flexibility Act Analysis

A. Need for the RulesB. Significant Issues Raised by Public

CommentsC. Small Entities Subject to the RulesD. Reporting, Recordkeeping, and Other

Compliance RequirementsE. Agency Action To Minimize Effect on

Small EntitiesVI. Statutory Basis and Text of AmendmentsI. Introduction

On December 18, 2013, we proposedrule and form amendments 17 toimplement Section 401 of the JumpstartOur Business Startups Act (the JOBSAct).8 Section 401 of the JOBS Actamended Section 3(b) of the SecuritiesAct by designating existing Section 3(b)as Section 3(b)(1), and creating newSections 3(b)(2)(5). Section 3(b)(2)directs the Commission to adopt rulesadding a class of securities exempt fromthe registration requirements of theSecurities Act for offerings of up to $50million of securities within a 12-monthperiod. Sections 3(b)(2)(5) specifymandatory terms and conditions forsuch exempt offerings and alsoauthorize the Commission to adoptother terms, conditions, or requirementsas necessary in the public interest andfor the protection of investors.9 Inaddition, Section 3(b)(5) directs theCommission to review the $50 millionoffering limit specified in Section3(b)(2) not later than two years after theenactment of the JOBS Act and everytwo years thereafter, and authorizes theCommission to increase the annualoffering limit if it determines that itwould be appropriate to do so.Accordingly, we are revising RegulationA under the Securities Act to requireissuers conducting offerings in relianceon Section 3(b)(2) to comply with termsand conditions established by the

17 See Rel. No. 339497 [79 FR 3925] (Dec. 18,2013) (the Proposing Release), available at:http://www.sec.gov/rules/prapased/2013/33-9497.pdf

15 Public Law 112106, 126 Stat. 306.are adopting a number of terms and

conditions for Regulation A offerings pursuant toour discretionary authority under Sections 3(b)(2)(5). Where we have done so, as discussed in detailin Section II. below, it is because we find suchterms and conditions to be necessary in the publicinterest and for the protection of investors.

Commissions rules, and, whereapplicable, to make ongoing disclosure.II. Final Rules aird Amendments toRegulation AA. Overview

We are adopting final rules toimplement the JOBS Act mandate byexpanding Regulation A into two tiers:Tier 1, for securities offerings of up to$20 million; and Tier 2, for offerings ofup to $50 million.20 The final rules forofferings under Tier 1 and Tier 2 buildon current Regulation A and preserve,with some modifications, existingprovisions regarding issuer eligibility,offering circular contents, testing thewaters, and bad actor disqualification.As proposed, and with themodifications described below, the finalrules modernize the Regulation A filingprocess for all offerings, align practicein certain areas with prevailing practicefor registered offerings, create additionalflexibility for issuers in the offeringprocess, and establish an ongoingreporting regime for Regulation Aissuers. Under the final rules, Tier 2issuers are required to include auditedfinancial statements in their offeringdocuments and to file annual,semiannual, and current reports withthe Commission. With the exception ofsecurities that will he listed on anational securities exchange uponqualification, purchasers in Tier 2offerings must either be accreditedinvestors, as that term is defined in Rule501(a) of Regulation D, or be subject tocertain limitations on their investment.The differences between Tier 1 and Tier2 offerings are described more fullybelow.

In developing the final rules, weconsidered the statutory language ofJOBS Act Section 401, the JOBS Actlegislative history, recentrecommendations of the CommissionsGovernment-Business Forum on SmallBusiness Capital Formation,2 theAdvisory Committee on Small andEmerging Companies,22 the EquityCapital Formation Task Force,23comment letters received on Title IV of

20An issuer of $20 million or less of securitiescould elect to proceed under either Tier I orTier 2.

2 of the commissionsGovernment-Business Forum on Small BusinessCapital Formation are available at: http://www.sec.gav/infa/smallbus/sbfarum.shtml.

22 Recommendations of the Advisory Committeeon Small and Emerging Companies are available at:http://www.sec.gov/infa/smallbus/acsec.shtml.

23Equity Capital Task Force, Fram the On-Rampta the Freeway: Refueling Jab creation and Grawthby Recannecting Investors with Small-CapCompanies, presentation to the US. Dept. ofTreasury (November 11, 2013), available at:http://www.equitycapitalfarmatiantaskforce.cam/.

the JOBS Act before the Commissionsproposed rules were issued in Decemberof 2013,24 and comment letters receivedto date on the Commissions proposedrules to implement Section 401 of theJOBS Act.25

The key provisions of the final rulesand amendments to Regulation Afollow: Scope of the exemptionthefinal rules: Establish two tiers of offerings: Tier 1: Annual offering limit of $20

million, including no more than $6million on behalf of sellingsecurityholders that are affiliates ofthe issuer.

Tier 2: Annual offering limit of $50million, including no more than $15million on behalf of sellingsecurityholders that are affiliates ofthe issuer.

Limit sales by selling securityholdersin an issuers initial Regulation Aoffering and any subsequentlyqualified Regulation A offering withinthe first 12-month period followingthe date of qualification of the initialRegulation A offering to no more than30% of the aggregate offering price.

Preserve the existing issuer eligibilityrequirements of Regulation A, andalso exclude issuers that are, or havebeen, subject to any order of theCommission pursuant to Section 12(j)of the Exchange Act entered withinfive years before the filing of theoffering statement and issuers that arerequired to, but that have not, filedwith the Conimission the ongoingreports required by the final rulesduring the two years immediatelypreceding the filing of an offeringstatement.

Limit the amount of securities that aninvestor who is not an accreditedinvestor under Rule 501(a) ofRegulation B can purchase in a Tier2 offering to no more than: (a) 10% ofthe greater of annual income or networth (for natural persons); or (b)10% of the greater of annual revenueor net assets at fiscal year end (fornon-natural persons). This limit willnot apply to purchases of securitiesthat will be listed on a national

24 facilitate public input on JOBS Actrulemaking before the issuance of rule proposals,the Commission invited members of the public tomake their views known on various JOBS Actinitiatives in advance of any rulemaking bysubmitting comment letters to the CommissionsWeb site at hup://wwwsecgov/spathght/jobsactcamments.shtml. Comment letters received to dateon Title IV of the JOBS Act are available at: http://www.sec.gav/comments/jabs-title-i v/jabs-titleiv.shtml.

25 The comment letters received to date inresponse to the Proposing Release are available at:http://wwwsecgav/camments/s7-1 1-13/s71 I l3shtmL


21808 Federal Register/Vol. 80, No. 75/Monday, April 20, 2015/Rules and Regulations

securities exchange uponqualification.

Exclude asset-backed securities, asdefined in Regulation AB, from thelist of eligible securities.

Update the safe harbor fromintegration and provide guidance onthe potential integration of offeringsconducted concurrently with, or closein time after, a Regulation A offering.Solicitation materials: Permit issuers to test the waters

with, or solicit interest in a potentialoffering from, the general public eitherbefore or after the filing of the offeringstatement, so long as any solicitationmaterials used after publicly filing theoffering statement are preceded oraccompanied by a preliminary offeringcircular or contain a notice informingpotential investors where and how themost current preliminary offeringcircular can be obtained.

Qualification, communications, andoffering process: Require issuers and intermediaries in

the prequalification period to delivera preliminary offering circular toprospective purchasers at least 48hours in advance of sale unless theissuer is subject to, and current in,Tier 2 ongoing reporting obligations.Where the issuer is subject to, andcurrent in, a Tier 2 ongoing reportingobligation, issuers and intermediarieswill only be required to comply withthe general delivery requirements foroffers.

Modernize the qualification,communications, and offeringprocesses in Regulation A to reflectanalogous provisions of the SecuritiesAct registration process: 26 Permit issuers and intermediaries to

satisfy their delivery requirementsas to the final offering circularunder an access equals deliverymodel when sales are made on thebasis of offers conducted during theprequalification period and thefinal offering circular is filed andavailable on the CommissionsElectronic Data Gathering, Analysisand Retrieval system (EDGAR);

Require issuers and intermediaries,not later than two business daysafter completion of a sale, toprovide purchasers with a copy ofthe final offering circular or a noticewith the uniform resource locator(URL) where the final offeringcircular may be obtained on EDGARand contact information sufficientto notify a purchaser where arequest for a final offering circular

26 See, e.g., Securities Offering Reform, Rel. No.338591 (July 19, 2005) [70 FR 447221.

can be sent and received inresponse; and

Permit issuers to file offeringcircular updates and supplementsafter qualification of the offeringstatement in lieu of post-qualification amendments in certaincircumstances, including to providethe types of information that may beexcluded from a prospectus underRule 430A.

Permit continuous or delayedofferings, but require issuers incontinuous or delayed Tier 2 offeringsto be current in their annual andsemiannual reporting obligations inorder to do so.

Permit issuers to qualify additionalsecurities in reliance on Regulation Aby filing a post-qualificationamendment to a qualified offeringstatement.Offering statement:

Require issuers to file offeringstatements with the Commissionelectronically on EDGAR.

Permit the non-public submission ofoffering statements and amendmentsfor review by Commission staff beforefiling such documents with theCommission, so long as all suchdocuments are publicly filed not laterthan 21 calendar days beforequalification.

Eliminate the Model A (Question-andAnswer) disclosure format under PartII of Form 1A.

Update and clarify Model B(Narrative) disclosure format underPart II of Form 1A (renamed,Offering Circular), while continuingto permit Part I of Form Si narrativedisclosure as an alternative.

Permit real estate investment trusts(REITs) and similarly eligiblecompanies to provide the narrativedisclosure required by Part I of FormSli in Part II of Form 1A.

Require that offering statements bequalified by the Commission beforesales may be made pursuant toRegulation A.

Require Tier 1 and Tier 2 issuers tofile balance sheets and relatedfinancial statements for the twoprevious fiscal year ends (or for suchshorter time that they have been inexistence).

Require Tier 2 issuers to includefinancial statements in their offeringcirculars that are audited inaccordance with either the auditingstandards of the American Institute ofCertified Public Accountants (MCPA)(referred to as U.S. GenerallyAccepted Auditing Standards orGAAS) or the standards of the PublicCompany Accounting OversightBoard (PCAOB).

Require Tier 1 and Tier 2 issuers toinclude financial statements in Form1A that are dated not more than ninemonths before the date of non-publicsubmission, filing, or qualification,with the most recent annual orinterim balance sheet not older thannine months. If interim financialstatements are required, they mustcover a period of at least six months.Ongoing reporting:

Require Tier I issuers to provideinformation about sales in suchofferings and to update certain issuerinformation by electronically filing aForm iZ exit report with theCoimnission not later than 30calendar days after termination orcompletion of an offering.

Require Tier 2 issuers to fileelectronically with the Commissionon EDGAR annual and semiannualreports, as well as current eventreports.

Require Tier 2 issuers to fileelectronically a special financialreport to cover financial periodsbetween the most recent periodincluded in a qualified offeringstatement and the issuers firstrequired periodic report.

Permit the ongoing reports filed by anissuer conducting a Tier 2 offering tosatisfy a broker-dealers obligationsunder Exchange Act Rule 15c2ll.

Provide that Tier 2 issuers reportingobligations under Regulation A wouldsuspend when they are subject to theongoing reporting requirements ofSection 13 of the Exchange Act, andmay also be suspended underRegulation A at any time by filing aForm 1Z exit report after completingreporting for the fiscal year in whichan offering statement was qualified, solong as the securities of each class towhich the offering statement relatesare held of record by fewer than 300persons, or fewer than 1,200 personsfor banks or bank holding companies,and offers or sales made in reliance ona qualified Tier 2 Regulation Aoffering statement are not ongoing. Incertain circumstances, Tier 2Regulation A reporting obligationsmay terminate when issuers are nolonger subject to the ongoingreporting requirements of Section 13of the Exchange Act.

Require Tier 2 issuers to include intheir first annual report aftertermination or completion of aqualified Regulation A offering, or intheir Form 1Z exit report,information about sales in theterminated or completed offering andto update certain issuer information.

Eliminate the requirement that issuersfile a Form 2A with the Commission



to report sales arid the termination ofsales made under Regulation A everysix months after qualification andwithin 30 calendar days after thetermination, completion, or final saleof securities in the offering.Exchange Act registration:

Conditionally exempt securitiesissued in a Tier 2 offering from themandatory registration requirementsof Section 12(g) of the Exchange Act,for so long as the issuer engages theservices of a transfer agent that isregistered with the Commission underSection 17A of the Exchange Act,remains subject to a Tier 2 reportingobligation, is current in its annual andsemiannual reporting at fiscal yearend, and had a public float of lessthan $75 million as of the lastbusiness day of its most recentlycompleted semiannual period, or, inthe absence of a public float, hadannual revenues of less than $50million as of its most recentlycompleted fiscal year.

Permit Tier 2 issuers to use a Form 8A short form registration statementconcurrentiy with the qualification ofa Regulation A offering statement thatincludes Part I of Form Si or FormSil narrative disclosure in Form 1A in order to register a class ofsecurities under Sections 12(g) or12(b) of the Exchange Act.Bad actor disqualification

provisions: Substantially conform the bad actor

disqualification provisions of Rule262 to Rule 5 06(d) and add adisclosure requirement similar to Rule506(e).Application af state securities laws:

Provide for the preemption of statesecurities law registration andqualification requirements forsecurities offered or sold to qualifiedpurchasers, in light of the totalpackage of investor protectionsincluded in the final rules. Aqualified purchaser will be defined tobe any person to whom securities areoffered or sold in a Tier 2 offering.The Commission is required by

Section 3(b)(5) of the Securities Act toreview the Tier 2 offering limitationevery two years. In addition to revisitingthe Tier 2 offering limitation, the staffwill also undertake to review the Tier 1offering limitation at the same time. Thestaff also will undertake to study andsubmit a report to the Commission nolater than 5 years following the adoptionof the amendments to Regulation A, onthe impact of both the Tier 1 and Tier2 offerings on capital formation andinvestor protection. The report will

include, but not be limited to, a reviewof: (1) The amount of capital raisedunder the amendments; (2) the numberof issuances and amount raised by bothTier 1 and Tier 2 offerings; (3) thenumber of placement agents and brokersfacilitating the Regulation A offerings;(4) the number of Federal, State, or anyother actions taken against issuers,placement agents, or brokers withrespect to both Tier 1 and Tier 2offerings; and (5) whether anyadditional investor protections arenecessary for either Tier 1 or Tier 2.Based on the information contained inthe report, the Commission may proposeto either decrease or increase theoffering limit for Tier 1, as appropriate.B. Scope of Exemption1. Eligible Issuersa. Proposed Rules

Section 401 of the JOBS Act does notinclude any express issuer eligibilityrequirements. The proposed ruleswould have maintained Regulation Asexisting issuer eligibility requirementsand added two new categories ofineligible issuers.27 The two newcategories would exclude issuers thatare or have been subject to any order ofthe Commission pursuant to Section12(j) of the Exchange Act entered withinfive years before the filing of the offeringstatement and issuers that are requiredto, but that have not, filed with theCommission the ongoing reportsrequired by the final rules during thetwo years immediately preceding thefiling of an offering statement.Additionally, we requested comment onother potential changes to the existingissuer eligibility requirements,including whether the exemptionshould be limited to operatingcompanies, United States domesticissuers, or issuers that use a certainamount of the proceeds raised in aRegulation A offering in the UnitedStates. We also solicited comment onwhether we should extend issuereligibility to non-Canadian foreignissuers, business developmentcompanies as defined in Section 2(a)(48)of the Investment Company Act of 1940

Existing Regulation A limits issuer eligibility toissuers organized, and with a principal place ofbusiness, in the United States or Canada, whileexcluding Exchange Act reporting companies,investment companies, including businessdevelopment companies, development stagecompanies that bave no specific business plan orpurpose or have indicated that their business planis to engage In a merger or acquisition with anunidentified company or companies, issuers offractional undivided interests in oil or gas rights ora similar interest In other mineral rights, andissuers disqualified because of Rule 262, 17 CFR230.262 (2014). See 17 CFR 230.251(al (2014).

(BDC5),le blank check companies,2e orExchange Act reporting companies, or,alternatively, eliminate shell companiesor REITs from the exemptive regime.b. Comments on the Proposed Rules

Commenters expressed a wide rangeof views on the proposed issuereligibility requirements. A number ofcommenters expressed general supportfor the proposed issuer eligibilityrequirements.3 Many commentersexpressly supported the new proposedissuer eligibility criterion relating to therequirement to be current in Tier 2ongoing reporting obligations.31 Onecommenter also expressly supported theproposed exclusion of issuers subject toan order of the Commission enteredpursuant to Section 12(j) of theExchange Act from the list of eligibleissuers.32 Other commenters suggestedadditional limitations on issuereligibility, including: a requirement thatissuers be operating companies,

28 5 U.S.C. 80a2(a)(48).Blank check companies are development

stage companies that have no specific business planor purpose or have indicated that their businessplan is to engage in a merger or acquisition withen unidentified company or companies. SeeSecurities Act Rule 419(a)(2)(i), 17 CFR230.419(a)(2)(i); see olao SEC Rel. No. 336949 [57FR 36442] (July 30, 1992), at In. so (clarifying thatblank check companies regardless of whether theyare issuing penny stock are precluded from relyingon Regulation Al.

ae Letter from Catherine T. Dixon, Chair, FederalRegulation of Securities Committee, Business LawSection, American Bar Association, April 3, 2014(ABA BLS Letter); Letter from Cabrielle Buckley,Chair, Section of International Law, American BarAssociation, May 14, 2014 (ABA SIL Leuer);Letter from Andrew F. viles, Canaccord LetterCenuity Inc., March 27, 2014 (Canaccord Letter);Letter from Pw Carey, March 24, 2014 (CareyLetter); Letter from Kurt N. Schacht, CFA,Managing Director, Standards and Financial MarketIntegrity, and Linda L. Rittenhuuae, Director,Capital Markets, CFA Institute, March 24, 2014(CFA Institute Letter); Letter from Kim Wales,Executive Board Member, Crowdfund IntermediaryRegulatory Advocates (cFIRA), May 14, 2014(CFIRA Letter 1]; Letter from Christopher Tyrrell,chair, Crowdfunding Intermediary RegulatoryAdvocates, February 23, 2015 (CFIRA Letter 2];Robert R. Kaplan, Jr. and T. Rhye James, Kaplanvoekier Cunningham & Frank PLC, March 23, 2014(KvCF Letter); Letter from William F. Calvin,Secretary, Commonwealth of Massachusetts, March24, 2014 (Massachusetts Letter 2); Letter fromMorrison & Foerster LLP, March 26, 2014 (MoFoLetter); Letter from Andrea Seidt, President, NorthAmerican Securities Administrators Association(NASAA) and Ohio Securities Commissioner,March 24, 2014 (NASAA Letter 2); Letter fromWilliam M. Beatty, Securities Administrator,Washington Department of Financial Institutions,March 24, 2014 (WDFI Letter); Letter fromWilliam R. Hambrecht, Chairman, WR HambrechtCo, March 4, 2014 (WR Hambrecht Co Letter),

31 ABA BLS Leuer; CFA Institute Letter;Massachuseus Letter 2; NASAA Letter 2; WDFILetter.

12CFA Institute Letter.13CFIRA Letter 1; WR Hambrecht Co Letter

(suggesting that limiting the availability of thecontinued



excluding shell companies and issuersof penny stock,34 and excluding othertypes of investment vehicles, such ascommodity pools and investment fundsthat invest in gold or virtualcurrencies.35

A few commenters recommendedallowing blank check companies andspecial purpose acquisition companies(SPACs) to rely on Regulation A.36 Oneof these commenters recommendedallowing blank check companiesseeking to raise at least $10 million touse Regulation A in the same manner asany other eligible issuer, but suggestedthat, if a company is raising less than$10 million in a Tier 2 offering, theCommission should implement certainadditional requirements.37 Anothercommenter recommended allowingissuers of fractional interests in oil andgas or other mineral rights to rely onRegulation A based on a reasonableeligibility test to be developed by theCommission.38 Several commentersopposed any change to the proposedissuer eligibility requirements thatwould exclude PElTs from participatingin Regulation A offerings.39 Othercommenters advocated expanding thecurrent categories of eligible issuers,and specifically supported thecontinued inclusion of Canadian

exemption to, among other things, operatingcompanies would provide investors with moreconfidence in the offerings conducted pursuani toRegulation Al. But aee KVCF Letter (suggesting thatlimiting availability of the exemption to operatingcompanies would unnecessarily limit the utility ofthe exemption).

BLS Letter; MoFo Letter.Massachusetts Letter 2.

35Gilmsn Law Letter; Letter from Mark Goldberg,Chairman, Investment Program Association, March24, 2014 (WA Letter); Letter from David N.Feldman, Partner, Richardson Patel LLP, January15, 2014 (Richardson Patel Letter). A SPAG is atype of blank check company created specifically topool funds in order to finance a merger oracquisition opportunity within a set timefrsme.

Richardson Patel Leuer (recommending that forofferings of less than $10 million under Tier 2, therules should require that: (a) Monies raised beplaced into escrow, minus underwriterscompensation and 10% for offering expenses, untila reverse merger is completed; (hI a combinationwith an operating business be completed withinthree years; (c) full Form 10 information bedisclosed regarding a pending reverse merger toinvestors who will have 1520 days to reconfirmtheir investment or receive their money back; (dlthere be no requirement that a certain percentageof investors reconfirm; and (e) accredited investorshave no limit on the investment they make in theoffering).

35Letter from Mark Kosanke, President, RealEstate Investment Securities Association, March 24,2014 (REISA Letter) (suggesting that thecommission base the eligibility test on the issuerhaving en established track record or someminimum emount of assets).

ABA BLS Letter; Letter from Gilman Law LLG,March 24, 2014 (Gilmsn Law Letter); MoFoLetter; Letter from Serenity Storage, January 5, 2014(Serenity Storage Letter).

companies and shell companies aseligible issuers, as proposed.4(1) Non-Canadian Foreign Issuers

Many commenters recommendedmaking non-Canadian foreigncompanies eligible issuers underRegulation A.4 Several commenterssuggested that the proposed approach tonon-Canadian foreign companies isinconsistent with the treatment offoreign private issuers in registeredofferings.42 Additionally, commentersnoted a variety of benefits arising fromallowing foreign companies to accessthe U.S. capital markets thoughRegulation A offerings, including jobcreation,43 increasing the amount ofdisclosure available for investors inforeign companies,44 encouragingdomestic exchange listings, expandinginvestment opportunities for U.S.investors,46 and general economicbenefits.47 One commenterrecommended making all foreign privateissuers eligible if they maintained aprincipal place of business in theUnited States.4e Two commenters alsorecommended permitting companies

Letter from Jonathan G. Guest, McGarter &English, LLP, February 19, 2014 (McGarter &English Letter) (also opposing any limitation onissuer eligibility on the bssis of wbether most of theoffering proceeds were being used in connectionwith the issuers operations in the United States,noting that many Gansdian issuers would beexcluded as a result); OTC Markets Letter.

41ABA SIL Letter; Letter from Scott Kupor,Managing Partner, Andreessen Horowitz, andJeffrey M. Solomon, Ghief Executive Officer, Gowenand company, February 26, 2014 (Andreessen!Gowen Letter): Letter from BOO USA, LLP, March20, 2104 (BOO Letter); Ganaccord Letter(suggesting expanding issuer eligibility tocompanies organized in )urisdictions with robustsecurities regulation systems such as the UnitedKingdom and other countries in the EuropeanUnion, Australia, and Asian markets such asSingapore and Hong Kong); McGarter & EnglishLeuer; OTC Markets Letter; Richardson Pstel Letter;Letter frons Michael T. Lempres, Assistant GeneralCounsel, SVB Financial Group, March 21, 2014(SVB Financial Letter); Letter from Bill Soby,Managing Director, Silicon Valley Global Shares,March 24, 2014 (SVGS Letter).

42Antheessen/Gowen Letter; BOO Letter;Richardson Patel Letter. In the context of registeredofferings, foreign private issuers may provide scaleddisclosure if it qualifies as a smaller reportingcompany, which is defined in Item 10(11(1) ofReguletion SK, 17 CFR 229.10(f](1), Securities ActRule 405, 17 CFR 230.405, and Exchange Act Rule12b2, 17 GFR 240.12b2, and rely on otherdisclosure accommodations.

43ABA SR. Leuer; SVGS Letter (noting that high-paying jobs would be crested by expanding globaltech companies).

44SVB Financial Letter.Andreessen/Gowen Letter; SVB Financial

Letter.46 Andreessen/Gowen Letter; OTC Markets Letter.47ABA SIL Letter; Andreessen/Gowen Letter;

McCarter & English Letter; SVB Financial Letter.46ABA SW Letter.

relying on Exchange Act Rule 12g32(b)to make offerings under Regulation A.4(2) BDCs

A number of commenters supportedmaking BDCs eligible issuers underRegulation A.5 Most of thesecommenters noted that BDCs serve animportant function in facilitating smallor emerging business capital formationor in providing a bridge from the privateto public markets.5 Several of thesecommenters recommended at leastallowing small business investmentcompany (SBIC) licensed BDCs to usethe exemption given the review processsuch entities are required to undergowith the U.S. Small BusinessAdministration.52 One of thesecommenters noted that if BDCs becomeeligible to use Regulation A, theCommission should consider requiringthem to provide quarterly financialdisclosure so as to enhancetransparency and provide the marketwith critical investment information.3(3) Potential Limits on Issuer Size

Several commenters opposed usingthe issuers size to limit eligibility.54Two of these commenters thought thatthe $50 million offering limit for Tier 2would already limit the utility of the

49 McGarter & English Letter; OTG Markets Letter.Rule 12g32W) generally provides foreign privateissuers with an automatic exemption fromregistration under Section 12(g) if the issuer (i) isnot required to file reports under Exchange ActSections 13(e) or 15(d); (ii) maintains a listing of thesubject class of securities on one or two exchangesin non-U.S. )urisdictions that comprise more then55% of its worldwide trading volume; and (iii)publishes in English on its Web site certain materialitems of information. See 17 GFR 240.12g32(h).

59ABA BLS Letter; CFII{A Letter 1; Letter fromMichael Sauvante, Executive Director,commonwealth Fund LLG, March 21, 2014(Gommonweslth Fund Letter 1); Letter fromMichael Sauvante, Executive Director,Gommnnwealth Fund LLc, March 22, 2014(Gommonwealth Fund Letter 2); KVGF Letter;Letter from Daniel Gorfine, Director, FinancialMarkets Policy, end Steci Warden, ExecutiveDirector, Genter for Financial Markets, MilkenInstitute, March 19, 2014 (Milken InstituteLetter); MoFo Letter; REISA Letter; SBIA Letter;WR Hembrecht co Letter.

ABA BLS Letter; GFIRA Letter 1;Commonwealth Fund Letter 1; GommonwealthFund Letter 2; KVGF Letter; Milken Institute Letter;MoFo Letter; REISA Letter; SBIA Letter; WRHambrecht + Go Letter.

52 Milken Institute Letter; SBIA Letter. A SBIGlicensed BDG is a company that is licensed by theSmall Business Administration (SBA) to operate assuch under the Small Business Investment Act of1958.

Milken Institute Letter.54 from E. Gartier Eshsrn, Executive Vice

President, Emerging Companies, BiotechnologyIndustry Organization (BID), March 11, 2014 (BIDLetter); IPA Letter; Letter from Tom Quaadman,Vice President, Center for Capital MarketsCompetitiveness, U.S. Chamber of Coimnerce,March 24, 2014 (U.S. Chamber of CommerceLetter).



exemption for issuers on the basis ofissuer sizewith smaller issuers likelybenefitting most from the exemptionand recommended against size-basedeligibility criteria that may be difficultto define.55 One commenter suggestedthat most issuers with a large publicfloat would likely be subject toExchange Act reporting requirementsand therefore would be ineligible to useRegulation A.56 Another commenternoted that a size restriction based onpublic float would be particularlyharmful to biotechnology companies,because they often have a public floatthat is disproportionately high inrelation to their corporate structure,number of employees, or revenues.57(4) Exchange Act Reporting Companies

A number of commenters supportedallowing Exchange Act reportingcompanies to conduct offerings underRegulation A.58 Several of thesecommenters recommended allowingExchange Act reporting companies thatare current in their reporting obligationsto conduct Tier 2 offerings,59 with onecommenter limiting its recommendationto companies with a non-affiliate float ofless than $250 million.60 Threecommenters further suggested that, ifExchange Act reporting companies arepermitted to conduct offerings pursuantto Regulation A, Exchange Act reportingshould satisfy any Regulation Areporting obligation.61 One suchcommenter further suggested thatExchange Act reporting companiesshould be required to be current in theirExchange Act reporting obligations inorder to be eligible to rely on theexemption, in a manner that isconsistent with Regulation A as itexisted before 1992.62c. Final Rules

We are adopting the issuer eligibilitycriteria as proposed. Under the finalrules, Regulation A will be limited tocompanies organized in and with their

BI0 Letter; U.S. Chamber of commerce Letter.561PA Letter.31O Letter.58Anr3jeessen/Cowen Letter; 310 Letter; OTC

Markets Letter; Letter from U.S. Senator Pat Roberts,May 27, 2014 (Sen. Roberts Letter); Letter fromJack H. Brier, President and Founder, US AllianceCorporation, March 19, 2014 (US Alliance Corp.Letter).

59Andreessen/Cowen Letter; 310 Letter; OTCMarkets Letter.

60010 Letter.6lAntheessen/Cowen Letter; CFIRA Letter 1; OTC

Markets Letter.62 CFIRA Letter 1. Before amendments to

Regulation A were adopted in 1992, Exchange Actreporting companies were permitted to conductofferings in reliance on Regulation A, provided theywere current in their public reporting. See 17 CFR230.252(f) (1992).

principal place of business in theUnited States or Canada. It will beunavailable to:

Companies subject to the ongoingreporting requirements of Section 13 or15(d) of the Exchange Act;

companies registered or required tobe registered under the InvestmentCompany Act of 1940 and BDCs;

blank check companies; issuers of fractional undivided

interests in oil or gas rights, or similarinterests in other mineral rights;

issuers that are required to, but thathave not, filed with the Commission theongoing reports required by the rulesunder Regulation A during the twoyears immediately preceding the filingof a new offering statement (or for suchshorter period that the issuer wasrequired to file such reports);

issuers that are or have been subjectto an order by the Commission denying,suspending, or revoking the registrationof a class of securities pursuant toSection 12(j) of the Exchange Act thatwas entered within five years before thefiling of the offering statement; 63 and

issuers subject to bad actordisqualification under Rule 262.64

We expect that the amendments weare adopting will significantly expandthe utility of the Regulation A offeringexemption.

Our approach in the final rules isgenerally to maintain the issuereligibility requirements of existingRegulation A with the limited additionof two new categories of ineligibleissuers. We believe this approach willprovide important continuity in theRegulation A regime as it expands in theway Congress mandated. For thisreason, we do not believe it is necessaryto adopt final rules to exclude issuersthat are currently eligible to conductRegulation A offerings. Additionally, werecognize that expanding the categoriesof eligible issuers, as suggested by anumber of commenters, could providecertain benefits, including increasedinvestment opportunities for investorsand avenues for capital formation forcertain issuers. We are concerned,however, about the implications ofextending issuer eligibility before theCommission has the ability to assess theimpact of the changes to Regulation Abeing adopted today. In light of thesechanges, we believe it prudent to deferexpanding the categories of eligibleissuers (for example, by including non-Canadian foreign issuers, BDCs, orExchange Act reporting companies)until the Commission has had theopportunity to observe the use of the

63 See Rule 251(b).64 See Rule 262.

amended Regulation A exemption andassess any new market practices as theydevelop.

Additionally, we are not adoptingfurther restrictions on eligibility at thistime. In light of the disclosurerequirements contained in the finalrules, we do not believe that it isnecessary to exclude additional types ofissuers, such as shell companies, issuersof penny stock, or other types ofinvestment vehicles, from relying on theexemption in Regulation A. At the sametime, we are concerned aboutpotentially increased risks to investorsthat could result from extending issuereligibility to other types of entities, suchas blank check companies, before theCommission has the opportunity toobserve developing market practices.We therefore believe the prudentapproach with respect to any potentialexpansion of issuer eligibility is to givethe Regulation A market time to developunder rules that we are adopting today.We also do not believe it is necessary tolimit availability of the exemption toissuers of a certain size, as we agreewith commenters that suggested that theannual offering limit will serve to limitthe utility of the exemption for largerissuers in need of greater amounts ofcapital. We further do not believe thatit is appropriate to limit the availabilityof the exemption to operatingcompanies, as that term would restrictavailability of the exemption to fewerissuers than are currently eligible underRegulation A, such as by excluding shellcompanies.

As proposed, the final rules includetwo new issuer eligibility requirementsthat add important investor protectionsto Regulation A. First, potential issuersmust have filed all required ongoingreports under Regulation A during thetwo years immediately preceding thefiling of a new offering statement (or forsuch shorter period that the issuer wasrequired to file such reports) to remaineligible to conduct offerings pursuant tothe rules. This requirement will benefitinvestors by providing them with moreinformation, with respect to issuers thathave previously made a Regulation Aoffering, to consider when making aninvestment decision, facilitate thedevelopment of an efficient secondarymarket in such securities, and enhanceour ability to analyze and observe theRegulation A market. Second, issuerssubject to orders by the Commissionentered pursuant to Section 12(j) of theExchange Act within a five-year periodimmediately preceding the filing of theoffering statement will not be eligible toconduct an offering pursuant toRegulation A. This requirement willincrease investor protection and



compliment the exclusion of delinquentRegulation A filers discussedimmediately above by excluding issuerswith a demonstrated history ofdelinquent filings under the ExchangeAct from the pooi of eligible issuersunder Regulation A.2. Eligible Securitiesa. Proposed Rules

Section 3(b)(3) of the Securities Actlimits the availability of any exemptionenacted under Section 3(b)(2) to equitysecurities, debt securities, and debtsecurities convertible or exchangeableinto equity interests, including anyguarantees of such securities. 65 Theproposed rules would have limited thetypes of securities eligible for sale underboth Tier 1 and Tier 2 of Regulation Ato the specifically enumerated list ofsecurities in Section 3(b)(3) and alsowould have excluded asset-backedsecurities, as defined in Regulation AB,from the list of eligible securities.b. Comments on the Proposed Rules

Several commenters supported theexclusion of asset-backed securitiesfrom the list of eligible securities.66 Onecommenter recommended clarifyingthat warrants exercisable for equity ordebt securities are eligible securities.67c. final Rules

We are adopting final rules that limitthe types of securities eligible for saleunder Regulation A to the specificallyenumerated list in Section 3(b)(3),which includes warrants andconvertible equity securities, amongother equity and debt securities.68 Thefinal rules exclude asset-backedsecurities from the list of eligiblesecurities. Asset-backed securities aresubject to the provisions of RegulationAB and other rules specifically tailoredto the offering process, disclosure, andreporting requirements for suchsecurities. These rules were not in effectwhen Regulation A was last updated in1992.69 We do not believe that Section

6515 U.S.C. 77c(b)(3).66 BLS Letter; Carey Letter; Massachusetts

Letter 2; NASAA Letter 2; WDFI Letter.67ABA BLS Letter.68 See Rule 261(c); see also Rule 405 (defining

equity security to include, among other things,warrants and certain convertible securities). Wehave also revised the proposed definition in Rule261(c) to clarify that all securities, rather than justequity securities, that are convertible orexchangeable into equity interests are eligible,subject to the other terms of Regulation A.

66 Regulation AB, 17 CFR 229.1100 et seq., wentinto effect in 2005. See Rel. No. 338518 (Dec. 22,20041. Asset-backed securities are defined in Rule1101(c)(1) to generally mean a security that isprimarily serviced by the cash flows of a discretepool of receivables or other financial asset, either

401 of the JOBS Act was enacted tofacilitate the issuance of asset-backedsecurities.3. Offering Limitations and SecondarySalesa. Proposed Rules

We proposed to amend Regulation Ato create two tiers of requirements: Tier1, for offerings of up to $5 million ofsecurities in a 12-month period; andTier 2, for offerings of up to $50 millionof securities in a 12-month period. Asproposed, issuers could conductofferings of up to $5 million undereither Tier 1 or Tier 2. Consistent withthe existing provisions of Regulation A,we also proposed to permit sales byselling securityholders of up to 30% ofthe maximum offering amountpermitted under the applicable tier ($1.5million in any 12-month period for Tier1 and $15 million in any 12-monthperiod for Tier 2). Sales by sellingsecurityholders under either tier wouldbe aggregated with sales by the issuerfor purposes of calculating themaximum permissible amount ofsecurities that may be sold during any12-month period. In addition, weproposed to eliminate the last sentenceof Rule 25 1(b), which prohibits affiliateresales unless the issuer has had netincome from continuing operations in atleast one of its last two fiscal years.b. Comments on the Proposed Rules

Commenters were generallysupportive of the proposed offeringlimitations on primary and secondaryofferings. Many commenters, however,suggested changes to the proposedoffering limits for both tiers, as well asto the proposed limits on secondarysales.(1) Offering Limitation

Several commenters recommendedthat the Commission increase the $50million offering limitation for Tier 2.71

fixed or revolving, that by its terms converts intocash within a finite time period.

70 As proposed, if the offering included securitiesthat were convertible, exercisable, or exchangeablefor other securities, the offer and sale of theunderlying securities would also be required to bequalified and the aggregate offering price wouldinclude the aggregate conversion, exercise, orexchange price of such securities, regardless ofwhen they become convertible, exercisable, orexchangeable.

71 from Salomon Kamalodine, Director,Investment Banking, B. Riley & Co., March 24, 2014(B. Riley Letter); Letter from William Klehm,Chairman and CEO, Fallbrook Technologies, March22, 2014 (Fallbrook Technologies Letter)(recommended raising the limit to $75 million);OTC Markets Letter (recommended raising the limitto $80 million); Jason Coombs, Co-founder andCEO, Public Startup Company, Inc., March 24, 2014(Public Startup Co. Letter 1) (recommended

As an alternative, one commenterrecommended applying the $50 millionlimit on a per offering basis rather thanon a 12-month basis, and suggested thatthe Commission consider eliminatingthe offering limits for certain types ofissuers, such as those that have yet togenerate revenue. 72 Additionally, twocommenters recommended that theCommission do more to increase theutility of Tier 1 offerings by raising theTier 1 offering limitation to $10 millionor more in a 12-month period.73Another commenter suggested that theCommission create a third tier inbetween Tier I and Tier 2 that wouldhave a $15 million offering limitation.7

With respect to offering limitcalculations, one commenterrecommended that the aggregate offeringprice of the underlying security only beincluded in the $50 million offeringlimitation during the 12-month periodin which such security is firstconvertible, exercisable, orexchangeab)e.75 This commentersuggested that its recommendedapproach would accommodate commonsmall business offering structures thatinvolve warrants exercisable at apremium over several years.(2) Secondary Sales Offering Limitation

Several commenters specificallysupported the proposed limitations onsecondary sales.76 While somecommenters indicated their support forresale limitations, they expressed apreference for either proscribing resalesentirely78 or requiring the approval ofthe resale offering by a majority of theissuers independent directors upon afinding that the offering is in the bestinterests of both the sellingsecurityholders and the issuer.7 Onecommenter recommended prohibiting

raising the limit to $75 million); Richardson PatelLetter (recommended raising the limit to $100million).

72 Richardson Patel Letter.73Letter from Samuel S Guzik, Guzik and

Associates, March 24, 2014 (Guzik Letter 1)(recommended raising the limit to at least $10million); Letter from Christopher Cole, Senior VicePresident and Senior Regulatory Counsel,Independent Community Bankers of America,March 25, 2014 (ICBA Letter) (encouragedincreasing the limit from $5 million to $10million).

74Public Startup Co. Letter 1.Andreessen/Cowen Letter; cf. Proposing

Release, In. 112.76 Massachusetts Letter 2; NASAA Letter 2;

Richardson Patel Letter; WDfI Letter.77 Massachusetts Letter 2; NASAA Letter 2; WDFI

Letter.78 Massachusetts Letter 2; NASAA Letter 2.79NASAA Letter 2 (supporting the proposed

limits coupled with a board approval requirementin lieu of prohibiting resales entirely); VDFI Letter(not expressing a preference for prohibiting resalesentirely).


Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations 21813

resales under Regulation A entirely.80Another commenter recommendedrequiring selling securityholders to holdthe issuers securities for 12 monthsbefore being eligible to sell pursuant toRegulation A, in order to distinguishbetween investors seeking to invest in abusiness and investors simply seekingto sell to the public for a gain.8

Many other commentersrecommended raising the resale limitsor eliminating them entirely.82 One suchcommenter recommended alternativelyremoving non-affiliate securityholdersfrom the resale limitation sinceconcerns over investor informationasymmetries would be reduced whendealing with non-affiliatesecurityholders 83 This commenter alsorecommended that the Commissionreevaluate the need for resale limitswithin a year of implementing the rules.Another commenter also recommendedallowing for unlimited sales by non-affiliate selling securityholders andfurther suggested that the rules notaggregate such sales with issuer sales.84Two commenters suggested thatlimitations on resales are contrary to theCongressional intent behind theenactment of Title IV of the JOBS Act.85(3) Rule 251(b)

Many commenters specificallysupported the proposed elimination ofthe requirement that issuers must havehad net income from continuingoperations in at least one of its last twofiscal years in order for affiliate resalesto be permitted, generally noting thatmany companies have net losses formany years, including, for example, dueto high research and developmentcosts.86c. Final Rules

We are adopting the proposedamendments to Regulation A withmodifications to the Tier 1 offeringlimitation and the secondary salesoffering limitation. We discuss theseamendments in detail below. We arealso making a technical change to clarify

80carey Letter.81 Letter from Andrew M. Hartnett, Missouri

Commissioner of Securities, March 24, 2014 (MSLetter).

82ABA BLS Letter; B. Riley Letter; CanaccordLetter; CFIRA Letter I; Milken Institute Letter;MoFo Letter; Richardson Patel Letter; WRHambrecht + Co Letter.

Milken Institute Letter.84 B. Riley Letter.85CF5?,,4 Letter 1; WR Hambrecht + Co Letter

(noting that the JOBS Act contemplated an increasein the offering threshold to $50 million, but did notlimit the percentage that could be sold by sellingsecurityholders).

86ABA BLS Letter; B. Riley Letter; CanaccordLetter; CFIRA Letter 1; Milken Institute Letter;MoFo Letter; WR Hambreclit + Co Letter.

the description of how compliance withthe offering limitations is calculated inRule 251(a).87Tier 1

As discussed more fully in theAdditional Considerations for SmallerOfferings section below, we are makingchanges to the proposed rules inresponse to comments and to increasethe utility of Tier 1 of the Regulation Aexemption.88 Several conimenters8 anda report on the impact of state securitieslaw requirements on offeringsconducted under Regulation A by theU.S Government Accountability Office(GAO), as required by Section 402 of theJOBS Act,9 highlighted the $5 millionoffering limitation in existingRegulation A as one of the main factorslimiting the utility of the exemption. Incertain circumstances, fixed costsassociated with conducting RegulationA offerings, such as legal andaccounting fees, may serve as adisincentive to use the exemption forlower offering amounts. We aretherefore increasing the offeringlimitation in the final rules for Tier 1offerings in a 12-month period from theproposed $5 million limitation to $20million. We believe that raising theoffering limitation for Tier 1 offerings,in addition to other changes discussedin Section 11.1. below, will increase theutility of the exemption for smallerissuers by providing them withadditional options for capital formationand potentially increasing the proceedsreceived by the issuer. Consistent withthe proportionate limitation onsecondary sales in the proposed rules,we are also increasing the limitation onsecondary sales in Tier 1 offerings in a12-month period from the proposed $1.5million limitation to $6 million.

87 proposed rules used the phrase aggregateoffering price for all securities sold whendiscussing the gross proceeds resulting from prioror anticipated sales of securities i.mder RegulationA. We have clarified Rule 257(a)(1) to define asaggregate sales gross proceeds within the prior 12month time frame contemplated by Regulation A.We have also made conforming changes elsewherein the final rules and forms.

8 Section fl.1. below,895ee, e.g., Guzik Letter 1; ICBA Letter; Public

Startup Co. Letter 1.90Factors that May Affect Trends in Regulation

A Offerings, GAO12839 (July 2012) (the GAOReport) (available at: http://www.gao.gov/assets/600/5921 13.pdl). The GAO Report concludes that itis unclear whether increasing the Regulation Aoffering ceiling from $5 million to $50 million willimprove the utility of the exemption.

9 Rule 251(a)(1). We intend to revisit the Tier 1offering limitation at the same time that we arerequired by Section 3(b)(5) of the Securities Act toreview the Tier 2 offering limitation and willconsider whether additional investor protectionswould be necessary if the Tier 1 offering limitationis increased.

Tier 2We are adopting the proposed $50

million Tier 2 offering limitation.92Some commenters suggested that weraise the offering limitation to anamount above the statutory limitationset forth in Section 3(b](2), but we donot believe an increase is warranted atthis time. While Regulation A hasexisted as an exemption fromregistration for some time, todayschanges are significant. We believe thatthe final rules for Regulation A willprovide for a meaningful addition to theexisting capital formation options ofsmaller companies while maintainingimportant investor protections. We areconcerned, however, about expandingthe offering limitation of the exemptionbeyond the level directly contemplatedin Section 3(b](2) at the outset of theadoption of final rules. As noted abovein Section II.B.1., the final rules do notlimit issuer eligibility on the basis ofissuer size, as we believe that the $50million annual offering limitation willserve to limit the utility of theexemption for larger issuers in need ofgreater amounts of capital. Similarly, webelieve that the more extensivedisclosure requirements associated withExchange Act reporting are moreappropriate for larger and generallymore complex issuers that raise moneyin the public capital markets.3 We aretherefore concerned that an increase inthe offering limitation at this time mayincrease risks to investors byencouraging larger issuers to conductofferings pursuant to Regulation A ininstances where disclosure pursuant toa registered offering under the SecuritiesAct would be more appropriate.

The Commission is required bySection 401 of the JOBS Act to reviewthe Section 3(b)(2) offering limitationevery two years, and we will considerthe use of the final rules by marketparticipants as part of that review. Wewill therefore revisit the offeringlimitation by April 2016, as required bythe statute, with a view to consideringwhether to increase the $50 millionoffering limitation. We also are adoptingthe proposed $15 million limitation onsecondary sales for Tier 2 as proposed,with a change in the application of thelimitation for secondary sales underboth Tier 1 and Tier 2 discussed in thefollowing section.Application of the Limitation onSecondary Sales

As noted in the Proposing Release,secondary sales are an important part ofRegulation A. We believe that allowing

82Rule 251(a)(2). See discussion in Section Ill.C.3. below.


21814 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Rules and Regulations

selling securityholders access toavenues for liquidity will encouragethem to invest in companies, althoughwe acknowledge that providing forsecondary sales in any amount may giverise to certain concerns. As highlightedby at least one commenter at the preproposing stage, permitting somesecondary sales pursuant to RegulationA could place investors at aninformational disadvantage to sellingsecurityholders who have potentiallygreater access to inside informationabout the issuer and does notnecessarily provide capital to theissuer.94 Other commenters stated thatsuch concerns are misplaced in thecontext of secondary sales by non-affiliates, who generally do not haveaccess to inside information.9

We do not believe that a wholesaleprohibition on secondary sales, assuggested by some commenters, isappropriate or necessary for either Tier1 or Tier 2 of Regulation A. However,in order to strike an appropriate balancebetween allowing sellingsecurityholders continued access toavenues for liquidity in Regulation Aand the concern that secondary offeringsdo not directly provide new capital tocompanies and could pose the potentialrisks to investors discussed above, thefinal rules continue to permit secondarysales but provide additional limitationson secondary sales in the first year. Thefinal rules limit the amount of securitiesthat selling securityholders can sell atthe time of an issuers first RegulationA offering and within the following 12months to no more than 30% of theaggregate offering price of a particularoffering.96 While the final rulescontinue to provide sellingsecurityholders with the flexibility tosell securities during this period, webelieve that this approach to the finalrules will help to ensure that secondarysales at the time of such offerings willbe made in conjunction with capitalraising events by the issuer.

Further, we are providing differentrequirements for secondary sales byaffiliates and by non-affiliates. The finalrules limit secondary sales by affiliatesthat occur following the expiration ofthe first year after an issuers initialqualification of an offering statement tono more than $6 million, in the case ofTier 1 offerings, or no more than $15million, in the case of Tier 2 offerings,over a 12-month period. Secondary salesby non-affiliates that are made pursuant

94Letter from A. Heath Abshure, President,NASAA, April 10, 2013 (NASAA (pre-proposal)Letter).

See, eg., MiLken Institute Letter.96Rule 251(a)(3) (Additional limitation on

secondary sales in first year).

to a qualified offering statementfollowing the expiration of the first yearafter an issuers initial qualification ofan offering statement will not be limitedexcept by the maximum offering amountpermitted by either Tier 1 or TierAlthough the secondary sales offeringamount limitation will only apply toaffiliates during this period, consistentwith the proposal, non-affiliatesecondary sales will be aggregated withsales by the issuer and sales by affiliatesfor purposes of calculating compliancewith the maximum offering amountpermissible under the respective tiers.98

We do not believe that the concernsexpressed by one commenter aboutinformational disadvantages that mayexist with affiliate sales are present withrespect to resales by non-affiliates. Onthe contrary, in comparison torequirements for non-affiliate resales ofrestricted securities after the expirationof Securities Act Rule 144 holdingperiods, we believe that Regulation Aprovides purchasers of such securitieswith the benefit of, among other things,narrative and financial disclosure that isreviewed and qualified by theCommission in transactions that aresubject to Section 12(a)(2) liability andthe antifraud provisions of Section 17 ofthe Securities Act. 101

We also disagree with the commenterswho suggested limitations on secondarysales are contrary to the legislativeintent behind the enactment of Title IVof the JOBS Act. We note that Section3(b)(2) expressly provides that theCommission may impose additionalterms, conditions, or requirements as itdeems necessary in the public interestand for the protection of investors.02For the reasons discussed above, webelieve that limiting secondary sales byaffiliates is not only consistent with thelanguage and purpose of the statute butalso necessary in the public interest andfor the protection of investors.Offering Limit Calculation

Under the proposal, if the offeringincluded securities that are convertible

97Rule 251(a).98Secondary sales of shares acquired in a

Regulation A offeringwhich are freely tradableare not subject to limitations on secondary sales,but must be resold under an exemption fromSecurities Act registration (e.g., Section 4(a)(1), 15U.S.C. 77d(a)(1)).

99NASAA (pre-proposal) Letter.100 Rule 144, non-affiliates of an issuer are,

among other things, permitted to resell restrictedsecurities after the expiration of a one-year holdingperiod without limitations or requirements as to: (i)The availability of current public information aboutthe issuer or its securities, (ii) the volume of resales,(iii) the manner of sale, or (iv) disclosure. See 17CFR 230.144.

101 15 U.S.C. 77](ak2), 77q.102 See Section 3(b)(2)(G), 15 U.S.C. 77c(b)(2)(G).

into, or exercisable or exchangeable for,other securities (rights to acquirel, theoffer and sale of the underlyingsecurities also would generally berequired to be qualified,bOa and theaggregate offering price would includethe aggregate conversion, exercise, orexchange price of such securities,regardless of when they becomeconvertible, exercisable, orexchangeable.4 Consistent with theviews of at least one commenter,5 weare concerned that the proposedrequirement could have a greater impacton smaller issuers than larger issuersbecause smaller issuers frequently issuerights to acquire other securities incapital raising events. The proposedmethod of calculating the offering limitwould presume the exercise price ofunderlying securities that, by theirterms, may occur at a date in the distantfuture or only upon the occurrence ofkey events. By including all securitiesunderlying any rights to acquire othersecurities in the offering limitcalculation, the proposed rules couldeffectively limit the proceeds of anoffering available to an issuer byrequiring such issuers to include in theaggregate offering price at the time ofqualification the securities underlyingrights to acquire that may or may notbecome exercisable or exchangeable inthe future. We are adopting final rulesthat will require issuers to aggregate theprice of all securities for whichqualification is currently being sought,including the securities underlying anyrights to acquire that are convertible,exercisable, or exchangeable within thefirst year after qualification or at thediscretion of the issuer. As such, andconsistent with the treatment of rights toacquire in the context of registeredofferings, if an offering includes rightsto acquire other securities at a timemore than one year after qualificationand the issuer does not otherwise seekto qualify such underlying securities,the aggregate offering price would notinclude the aggregate conversion,exercise, or exchange price of theunderlying securities.106 For purposes

103 Qualification would not be required forsecurities transactions exempt from registrationpursuant to Securities Act Section 3(a)(9l, 15 U.S.C.77c(a)(9). Section 3(a)(9) exempts from registrationany security exchanged by the issuer with itsexisting security holders exclusively where nocommission or other remuneration is paid or givendirectly or indirectly for soliciting such exchange.

104 See note to proposed Rule 251(a).105 Andreessen/Cowen Letter.106 See note to Rule 25 1(a). In these

circumstances, the securities underlying the rightsto acquire would need to be separately qualifiedunder Regulation A or, depending on thecircumstances, registered, exempt from registration,or otherwise offered in an appropriate manner atthe time of issuance.


Federal Register/Vol. 80, No. 75/Monday, April 20, 2015/Rules and Regulations 21815

of calculating the price of underlyingsecurities that use a pricing formula, asopposed to a known conversion price,the issuer will be required to use themaximum estimated price for whichsuch securities may be converted,exercised, or exchanged.107Rule 251(b)

We are adopting as proposed finalrules that eliminate the last sentence ofRule 251(b),b08 which prohibitedaffiliate resales unless the issuer had netincome from continuing operations in atleast one of its last two fiscal years. Weagree with the views expressed bycommenters that the absence of netincome, by itself, is not a sufficientindicator of an enhanced risk thatexisting shareholders will useinformational advantages to transfertheir holdings to the investing publicthat would necessitate the continuedapplication of the prohibition in thefinal rules. Further, as noted in theProposing Release, the Commissionscurrent disclosure review andqualification processes and enforcementprograms are significantly moresophisticated and robust than they werewhen this provision was added toRegulation A in its original form.109 Inaddition, the final rules being adoptedtoday include revised bad actordisqualification provisions andadditional issuer eligibilityrequirements aimed at limiting access tothe exemption for market participantswith demonstrated track records of noncompliance or abuse.4. Investment Limitation

a. Proposed Rules

Regulation A does not currently limitthe amount of securities an investor canpurchase in a qualified Regulation Aoffering. As we noted in the ProposingRelease, however, we recognize thatwith the increased annual offeringlimitation provided in Section 3(b)(2)comes a risk of commensurately greaterinvestor losses.hhl To address that riskwe proposed, among other things, tolimit the amount of securities investorscan purchase in a Tier 2 offering to nomore than 10% of the greater of theirannual income or their net worth. Forthis purpose, annual income and networth would be calculated as providedin the accredited investor definition

17 CFR 230.251(b) (2014).109 Proposing Release, at Section 11.3.3.10See discussions in Section lI.G (Bad Actor

Disqualification) below and Section II.B.1 (EligibleIssuers) above.

111 See Proposing Release, at Section 11.B.4.

under Rule 501 of Regulation D.2Under the proposal, issuers would berequired to make investors aware of theinvestment limitations,h13 but wouldotherwise be able to rely on aninvestors representation of compliancewith the proposed investment limitationunless the issuer knew, at the time ofsale, that any such representation wasuntrue.

b. Comments on Proposed RulesA number of commenters generally

supported investment limitations forTier 2 offerings. These commentersbelieved that an investment limitationwould serve as an important investorprotection. Several commentersrecommended revisiting the necessity ofthe limitations after a one- to three- yeartrial period,5 and anothercommenter6 recommended extendingthe investment limitation to Tier Iofferings to make them more consistentwith our proposed rules for securities-based crowdfunding transactionsconducted pursuant to Section 4(a)(6) ofthe Securities Act.117 Somecommenters support for the proposedinvestment limitations was conditionedon suggested changes to the proposedrules that would require issuers to domore to ensure compliance with thelimitations and that would imposeadverse consequences on issuers for thefailure to do so8 One commenterbelieved that the 10% limitation issignificantly higher than isappropriate for all but the wealthiest,least risk averse investors.9 Twocommenters suggested that the 10%limitation should be aggregated acrossall Regulation A offerings instead ofbeing applied on a per offering basis,2while one commenter specificallyargued against such an aggregatedlimit.121

11217 CFR 230.501.113 See paragraph (a)(5) to Part H of proposed

Form 1A.4CFA Institute Letter; EPA Letter; Letter from

Robert Kisel, Small Business Owner, March 18,2014 (Kisel Letter) (erroneously referring to the10% limit as a 5% limit); MCS Letter; REISA Letter;Richardson Patel Letter; WDFI Letter.

15CFIRA Letter 1; Kisel Letter; Milken InstituteLetter.

6CfA Institute Letter.117 See Crowdftriiding, Rel. No. 339470 [78 FR

66427] (Nov. 5, 2013).5CFA Institute Letter; MCS Letter; WDFI Letter.119 Letter from Barbara Roper, Director of Investor

Protection, consumer Federation of America, March24, 2014 (CFA Letter).

20CFA Letter (not recommending thisspecifically, but noting this as one reason why theinvestment limit was not an adequate substitute forstate review of Tier 2 offerings); William A.Jacobson, clinic Professor of Law, cornell LawSchool, and Director, Cornell Securities Law Clinic,March 24, 2014 (Cornell Clinic Letter).

21KVCF Letter.

Numerous commenters recommendedeliminating the investment limitationfor Tier 2 offerings.22 Several of thesecommenters alternatively recommendedat least doubling the limit if theprovision is not eliminated entirely.123Other commenters thought that theinvestment limitation is unnecessary inlight of the other investor protections forTier 2 offerings, such as the expandeddisclosure requirements.24 Severalcommenters noted that the limit doesnot have a statutory basis and suggestedthat it may be contrary to Congressionalintent,25 or contrary to the principlesunderlying federal securities law, whichfocus on fraud prevention and fulldisclosure.126 One commenterrecommended eliminating theinvestment limitations only if the finalrules do not preempt state lawregistration requirements for Tier 2offerings, arguing that the limitationsmay conflict with state investorsuitability standards,27 while anothercommenter indicated that investmentlimitations would be unnecessary withappropriate state oversight, butsupported limits for retail investors instartup companies and high-riskofferings.28 Another commenterrecommended creating variouscategories of investor sophisticationwith corresponding requirements andlimitations for each.29

Many commenters, including thoseboth for and against the investmentlimit, recommended providingexceptions to the limit for certain typesof investors, such as accreditedinvestors, or altering the application of

122 ABA BLS Letter; Andreessen/Cowen Letter; B.Riley Letter; CFIRA Letter 1; CFIRA Letter 2;Falibrook Technologies Letter; Letter fromGroundfloor Finance, Inc., Nov. 18, 2014(Groundfloor Letter); Heritage Letter; ICBA Letter;PA Letter; Letter from Ford C. Ladd, Esq., May 19,2014 (Ladd Letter 2); Letter from John Rodenrys,Executive Director R&D, Leading Biosciences, Inc.,March 24, 2014 (Leading Biosciences Letter);Milken Institute Letter; MoFo Letter; NASAA Letter2; Letter from Michael L. Zuppone, Paul HastingsLLP, March 24, 2014 (Paul Hastings Letter); Letterfrom Jason Coombs, Co-Founder and CEO, PublicStartup Company, Inc., April 2, 2014 (PublicStartup Co. Letter 7); SVB Financial Letter.

23Fallbrook Technologies Letter; LeadingBiosciences Letter; ICBA Letter.

124 ABA BLS Letter; Andreessen/Cowen Letter; B.Riley Letter; MoFo Letter; Paul Hastings Letter; SVBFinancial Letter.

25ABA BLS Letter; Andreessen/Cowen Letter;CFIRA Letter 1; Heritage Letter; MoFo Letter; WRHambrecht + Co Letter.

126 ABA BLS Letter; B. Riley Letter; HeritageLetter; Milken Institute Letter.

127 Groimdfioor Letter.128 NASAA Letter 2.129 Cornell Clinic Letter (recommending the tiered

investment limits in our proposed rules forsecurities-based crowdffinding as an example).


21816 federal Register/Vol. 80, No. 75/Monday, April 20, 2015 /Rules and Regulations

the limit to such types of investors.130These commenters believed that theinvestor protections afforded by theinvestment limit would not be necessaryfor all types of investors or in all typesof Regulation A offerings. Someconimenters recommended eliminatingthe investment limit for accreditedinvestors131 One such commenterrecommended eliminating theinvestment limit generally and, if not, atleast for institutional investors andofferings of securities listed onsecurities exchanges.32 Severalcommenters recommended eliminatingthe investment limit for non-naturalpersons or institutional investors.33Other commenters recommendedeliminating the investment limits forother types of investors or offerings.13Two commenters noted that it would bedifficult to apply the investment limitsto non-natural persons (such as smallbusinesses and TEAs) if the rules use anincome or net worth test.35 One ofthese commenters recommended that, ifthe test applies to such investors, itshould be based on assets or revenue.36

Many commenters explicitlysupported allowing issuers to rely on aninvestors representation of compliance

3 ABA BLS Letter; Andreessen/Cowen Letter;canaccord Letter; cornell clinic Letter; FalibrookTechnologies Letter; Heritage Letter; Ladd Letter 2;Leading Biosciences Letter; Mccarter & EnglishLetter; MCS Letter; Milken Institute Letter; MoFoLetter; Paul Hastings Letter; Richardson Patel Letter;SVB Financial Letter; WR Hambrecht + co Letter.

ABA BLS Letter; Andreessen/Cowen Letter;Canaccord Letter; Falibrook Technologies Letter;Heritage Letter; Ladd Letter 2; Leading BiosciencesLetter; McCarter & English Letter; MCS Letter; MoFoLetter; Paul Hastings Letter; Richardson Patel Letter;SVB Financisi Letter; cf cornell Clinic Letter(recommending an unspecified higher limit foraccredited investors]; Milken Institute Letter; WRHambrecht + Co Letter (supporting eliminating theinvestment limit generally).

32Milken Institute Letter.133 BLS Letter; Canaccord Letter; Milken

Institute Letter; Mofo Letter; WR Hamhrecht CoLetter. Several of these commenters believed that,as proposed, the investment limitations would notapply to non-natural persons and asked theCommission to confirm or clarify this point.

134 Cornell Clinic Letter (creating a separate,higher limit for institutional investors and othertypes of non-retail investors included in theaccredited investor definition]; Heritage Letter(eliminating the investment limit for any currentor former investor, employee or officer of theissuer); Ladd Letter 2 (eliminating the investmentlimit for any non-accredited affiliates, founders,employees, agents, independent contractors andowners]; Milken Institute Letter (eliminating theinvestment limit for investors that purchase Tier 2securities on an exchange); Paul Hastings Letter(eliminating the investment limit for offeringsconducted by registered broker-dealers); RichardsonPatel Letter (eliminating the investment limit forany non-individual investor with at least $100,000in assets or $100,000 in revenue in the previousfiscal year).

35McCarter & English Letter; Richardson PatelLetter.

36Richardson Patel Letter.

with the 10% investment limit.3 Mostof these commenters stated that anymore rigorous verification processwould cause the compliance costs to betoo high. One commenter recommendedeliminating any obligation for the issuerto monitor the 10% investment limitand allowing the issuer to rely on arepresentation by the investor that he orshe will notify the issuer uponexceeding the 10% limit.38 Anothercommenter recommended permitting anissuer to rely on representations from itsunderwriters or broker-dealers as to the10% investment limit, rather thanhaving to seek this directly frominvestors.39 This commenter believedthat the issuers in most Tier 2 offeringswould have little direct contact with theinvestors and that the intermediarieswould be better positioned to assesscompliance (possibly already havinginformation about the investorsfinances).

Several commenters disagreed withallowing investors to representcompliance with the investmentlimitation and recommended a standardthat would require an issuer to do moreto ensure compliance.140 Twocommenters recommended adopting astandard requiring issuers to takereasonable steps to verify that thepurchasers are in compliance with the10% investment limit.141 Twocommenters recommended requiring anissuer to have a reasonable belief orreasonable basis that it can rely on aninvestors representation of compliancewith the 10% investment limit.142 Onesuch commenter also suggestedallowing accredited investors to exceedthe 10% investment limit, but requiringthat the issuer take reasonable steps toverify accredited investor status.43 Onecommenter recommended requiring aduty of inquiry so that the issuerwould have to follow-up on any redflags. Additionally, this commenterrecommended that the Commissioncreate an independent and secure meansof verifying investor income or torequire a mandatory questionnaire forindividual investors to complete before

37Fallbrook Technologies Letter; Heritage Letter;IPA Letter; KVCF Letter; Leading Biosciences Letter;REISA Letter.

138RE1SA Letter.39KVCF Letter.140 from Paul Sigelman, President & CEO,

Accredited Assurance, March 24, 2014 (AccreditedAssurance Letter); CFA Letter; CFA InstituteLetter; Cornell Clinic Letter; MCS Letter; WDFILetter.

141 Accredited Assurance Letter; WDFI Letter.142 CFA Institute Letter; MCS Letter.

MCS Letter.144 Cornell Clinic Letter.

buying a security issued underRegulation A.c. Final Rules

We are adopting an investmentlimitation for Tier 2 offerings in thefinal rules, with minor modificationsfrom the proposed rules. We believe thatthe investment limitation serves as animportant investor protection and mayhelp to mitigate the risk that with theincreased annual offering limitationprovided in Section 3(b)(2) comes a riskof commensurately greater investorlosses. We do not believe that thelimitation is needed for accreditedinvestors because investors that qualifyas accredited under our rules satisfycertain criteria that suggest they arecapable of protecting themselves intransactions that are exempt fromregistration under the Securities Act.145We also do not believe that thelimitation is necessary for investmentsin securities that will be listed on anational securities exchange uponqualification because of the issuerlisting requirements and the potentialliquidity that exchanges provide toinvestors that seek to reduce theirholdings. These both are importantinvestor protections that help tomitigate concerns about the magnitudeof loss that could potentially result froman investor purchasing a large amountof securities in a sinale offering.

Under the final rules, the investmentlimitations for purchasers in Tier 2offerings will not apply to purchaserswho qualify as accredited investorsunder Rule 501 of Regulation D.46further, investment limitations in a Tier2 offering will not apply to the sale ofsecurities that will be listed on anational securities exchange uponqualification since such issuers will berequired to meet the listing standards of

45See Rule 501(a) of Regulation 0, 17 CFR230.501(a); see also SECv. Ralston Purina Co., 346U.S. 119 (1953).

46See Rule 252(c)(2). Under Rule 501, naturalpersons are accredited investors if: (1) Their incomeexceeds $200,000 in each of the two most recentyears (or $300,000 in joint income with a personsspouse), and they reasonably expect to reach thesame income level in the current year; (ii] theyserve as executives or directors of the issuer; or (iii)their net worth exceeds $1,000,000 (individual orjointly with a spouse), excluding the value of theirprimary residence. Certain enumerated entities thatsatisfy an asset-based test also qualify as accreditedinvestors, while others, including regulated entitiessuch as banks and registered investment companies,are not subject to the asset test. See 17 CFR 230.501.The accredited investor definition is intended toencompass those individuals and entities whosefinancial sophistication and ability to sustain therisk of loss of investment or ability to fend forthemselves render the protections of the SecuritiesActs registration process unnecessary. See, e.g.,Rel. No. 336683 (Jan. 16, 1987) [52 FR 3015](Regulation 0 Revisions; Exemption for CertainEmployee Benefit Plans).


Galvin v SEC

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