
[Federal Register Volume 80, Number 217 (Tuesday, November 10, 2015)]
[Proposed Rules]
[Pages 69785-69832]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-28219]



[[Page 69785]]

Vol. 80

Tuesday,

No. 217

November 10, 2015

Part II





Securities and Exchange Commission





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17 CFR Part 230





 Exemptions To Facilitate Intrastate and Regional Securities Offerings; 
Proposed Rule

  Federal Register / Vol. 80 , No. 217 / Tuesday, November 10, 2015 / 
Proposed Rules  

[[Page 69786]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release Nos. 33-9973; 34-76319; File No. S7-22-15]
RIN 3235-AL80


Exemptions To Facilitate Intrastate and Regional Securities 
Offerings

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules.

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SUMMARY: We are proposing amendments to Rule 147 under the Securities 
Act of 1933, which currently provides a safe harbor for compliance with 
the Section 3(a)(11) exemption from registration for intrastate 
securities offerings. Our proposal would modernize the rule and 
establish a new exemption to facilitate capital formation, including 
through offerings relying upon recently adopted intrastate crowdfunding 
provisions under state securities laws. The proposed amendments to the 
rule would eliminate the restriction on offers and ease the issuer 
eligibility requirements, while limiting the availability of the 
exemption at the federal level to issuers that comply with certain 
requirements of state securities laws.
    We further propose rule amendments to Rule 504 of Regulation D 
under the Securities Act to facilitate issuers' capital raising efforts 
and provide additional investor protections. The proposed amendments to 
Rule 504 would increase the aggregate amount of securities that may be 
offered and sold in any twelve-month period from $1 million to $5 
million and disqualify certain bad actors from participation in Rule 
504 offerings.

DATES: Comments should be received by January 11, 2016.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment forms (http://www.sec.gov/rules/proposed.shtml);
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-22-15 on the subject line; or
     Use the Federal Rulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Brent J. Fields, Secretary, 
Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549-1090.

All submissions should refer to File Number S7-22-15. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's Web 
site (http://www.sec.gov/rules/proposed.shtml). Comments also are 
available for Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE., Washington, DC 20549, on official 
business days between the hours of 10:00 a.m. and 3:00 p.m. All 
comments received will be posted without change; we do not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.
    Studies, memoranda or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the SEC's Web site. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Anthony G. Barone, Special Counsel, or 
Zachary O. Fallon, Special Counsel, Office of Small Business Policy, 
Division of Corporation Finance, at (202) 551-3460, U.S. Securities and 
Exchange Commission, 100 F Street NE., Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION: We propose to amend Rule 147 \1\ and Rule 
504 \2\ of Regulation D \3\ under the Securities Act of 1933 (the 
``Securities Act'') \4\ and to make technical amendments to Rules 504 
and 505 \5\ of Regulation D.
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    \1\ 17 CFR 230.147.
    \2\ 17 CFR 230.504.
    \3\ 17 CFR 230.500 through 230.508.
    \4\ 15 U.S.C. 77a et seq.
    \5\ 17 CFR 230.505.
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Table of Contents

I. Introduction And Background
II. Proposed Amendments To Rule 147
    A. Rationale for Proposed Amendments to Rule 147
    B. Explanation of Proposed Amendments to Rule 147
    1. Elimination of Limitation on Manner of Offering
    2. Elimination of Residence Requirement for Issuers
    3. Requirements for Issuers ``Doing Business'' In State
    4. Additional Amendments to Rule 147
    a. Reasonable Belief as to Purchaser Residency Status
    b. Residence of Entity Purchasers
    c. Limitation on Resales
    d. Integration
    e. Other Considerations
    f. State Law Requirements
    C. Preservation of Section 3(a)(11) Statutory Intrastate 
Offering Exemption
III. Proposed Amendments To Rules 504 And 505 Of Regulation D
    A. Overview of Rules 504 and 505
    B. Proposed Amendments to Rules 504 and 505
    C. Continued Utility of Rule 505 as an Exemption from 
Registration
IV. General Request For Comment
V. Economic Analysis
    A. Baseline
    1. Current Market Participants
    a. Issuers
    b. Investors
    c. Intermediaries
    2. Alternative Methods of Raising up to $5 Million of Capital
    a. Exempt Offerings
    b. Regulation Crowdfunding
    c. Private Debt Financing
    B. Analysis of Proposed Rules
    1. Introduction
    2. Analysis of Proposed Amendments to Rule 147
    a. Elimination of Limitation on Manner of Offering
    b. Ease of Eligibility Requirements for Issuers
    c. Maximum Offering Amount and Investment Limitations for 
Offerings with Exemption from State Registration
    3. Additional Amendments to Rule 147
    4. Analysis of Proposed Amendments to Rule 504
    C. Alternatives
    1. Rescind Rule 505 Exemption
    2. Lower Qualifying Thresholds under ``Doing Business'' In-State 
Tests
    3. Eliminate ``Doing Business'' In-State Tests
    4. Decreasing or Increasing Rule 504 Maximum Offering Limit
    5. Additional Amendments to Rule 504
    D. Request for Comment
VI. Paperwork Reduction Act
VII. Initial Regulatory Flexibility Act Analysis
VIII. Small Business Regulatory Enforcement Fairness Act
IX. Statutory Basis And Text Of Proposed Rules

I. Introduction and Background

    Today's proposals are part of the Commission's efforts to assist 
smaller companies with capital formation consistent with other public 
policy goals, including investor protection. These proposals also 
complement recent efforts by the U.S. Congress,\6\ state

[[Page 69787]]

legislatures,\7\ and state securities regulators \8\ to modernize 
existing federal and state securities laws and regulations to assist 
smaller companies with capital formation. We believe that the proposed 
amendments to Rule 147 and the amendment to increase the offering 
amount limitation in Rule 504 will help to facilitate capital formation 
by smaller companies by increasing the utility of these rules while 
maintaining appropriate protections for investors who purchase 
securities in these offerings. We believe that the proposed 
disqualification of certain bad actors from participation in Rule 504 
offerings will provide for greater consistency across Regulation D and 
increase investor protection in such offerings.
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    \6\ Congress enacted the Jumpstart Our Business Startups Act of 
2012 (the ``JOBS Act''), which was signed into law by President 
Obama on April 5, 2012. Pub. L. 112-106, 126 Stat. 306. Pursuant to 
Title II of the JOBS Act, the Commission adopted new paragraph (c) 
of Rule 506 of Regulation D, removing the prohibition on general 
solicitation or general advertising for securities offerings relying 
on Rule 506. See SEC Rel. No. 33-9415 (July 10, 2013). Pursuant to 
Title IV of the JOBS Act, the Commission amended Regulation A in 
order to permit issuers to raise up to $50 million annually. SEC 
Rel. No. 33-9741 (March 25, 2015) (``2015 Regulation A Release''). 
Pursuant to Title III of the JOBS Act, the Commission adopted rules 
permitting companies to use the Internet to offer and sell 
securities through crowdfunding (``Regulation Crowdfunding''). See 
SEC Rel. No. 33-9974 (Oct. 30, 2015) (``Regulation Crowdfunding 
Adopting Release'').
    \7\ See, e.g., Ala. Code Sec.  8-6-11 (2014); Ariz. Rev. Stat. 
Ann. Sec.  44-1844 (2015); Colo. Rev. Stat. Sec.  11-51-304(6) 
(2014); Fla. Stat. Sec.  571.021, 517.061, 517.0611, 517.12, 
517.121, 517.161, 626.9911; Ind. Code Sec.  6-3.1-24-14 (2014); Ky. 
Rev. Stat. Ann. Sec.  292.410-292.415 (2015); Me. Rev. Stat. Ann. 
tit. 32, Sec.  16304, sub-Sec.  6-a (2014).
    \8\ See, e.g., DC Mun. Regs. tit. 26-B, Sec.  250 (2014); Ga. 
Comp. R. & Regs. 590-4-2-.08 (2011); Idaho Code Ann. Sec.  30-14-203 
(providing an exemption by order on a case-by-case basis); Kan. 
Admin. Regs. Sec.  81-5-21 (2011).
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    We propose to modernize and expand Rule 147 under the Securities 
Act, a safe harbor for intrastate offerings exempt from registration 
pursuant to Securities Act Section 3(a)(11).\9\ Consistent with the 
suggestions of market participants and state securities regulators,\10\ 
the proposal would expand upon the statutory exemption in order to 
modify certain regulatory requirements of the rule that no longer 
comport with modern business practices or communications technology, 
thereby limiting the utility of the safe harbor for intrastate 
offerings, particularly in offerings by issuers seeking to raise 
capital pursuant to recently adopted crowdfunding provisions under 
state securities laws. The proposed amendments would eliminate the 
current restriction on offers, while continuing to require that sales 
be made only to residents of the issuer's state or territory. The 
proposed amendments also would redefine what it means to be an 
``intrastate offering'' and ease some of the issuer eligibility 
requirements in the current rule, making the rule available to a 
greater number of businesses seeking intrastate financing. We also 
propose to limit the availability of the exemption to offerings that 
are either registered in the state in which all of the purchasers are 
resident or conducted pursuant to an exemption from state law 
registration in such state that limits the amount of securities an 
issuer may sell pursuant to such exemption to no more than $5 million 
in a twelve-month period and imposes an investment limitation on 
investors.
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    \9\ 15 U.S.C. 77c(a)(11) (exempting ``any security which is a 
part of an issue offered and sold only to persons resident within a 
single state or territory, where the issuer of such security is a 
person residing and doing business within, or, if a corporation, 
incorporated by and doing business within such state or 
territory.'').
    \10\ See, e.g., Transcript of Record at 78, SEC Advisory 
Committee on Small and Emerging Companies (June 3, 2015), available 
at http://www.sec.gov/info/smallbus/acsec/acsec-minutes-060315.pdf; 
State Based Crowdfunding, presentation by Michael S. Pieciak, NASAA 
Corporate Finance Chair, SEC Advisory Committee on Small and 
Emerging Companies (June 3, 2015), available at http://www.sec.gov/info/smallbus/acsec/state-based-crowdfunding.pdf; Letter from 
Stanley Keller, Fed. Regulation of Sec. Comm. of the Bus. Law 
Section of the American Bar Assoc., to Linda C. Quinn and Mary E.T. 
Beach of the SEC Div. of Corp. Fin. (``ABA Letter''), submitted as 
appendix to letter from Stanley Keller to the SEC Advisory Committee 
on Small and Emerging Companies (June 1, 2015), available at http://www.sec.gov/comments/265-27/26527-50.pdf.
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    We also propose to amend Rule 504 of Regulation D under the 
Securities Act to increase the aggregate amount of securities that may 
be offered and sold pursuant to Rule 504 in any twelve-month period 
from $1 million to $5 million and to disqualify certain bad actors from 
participation in Rule 504 offerings. The proposed increase would 
facilitate capital formation by increasing the flexibility that state 
securities regulators have to implement coordinated review programs to 
facilitate regional offerings.\11\ The proposed bad actor 
disqualification provisions would provide for greater consistency 
across Regulation D. If adopted, the amendments to Rule 504 could 
result in the diminished utility of Rule 505, which historically has 
been little utilized in comparison to Rule 506 \12\ of Regulation D. We 
therefore seek comment on whether Rule 505 should be retained in its 
current or a modified form as an exemption from registration, or 
repealed.
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    \11\ The state registration of securities offerings under 
coordinated review programs are examples of efforts undertaken by 
states to streamline the state registration process for issuers 
seeking to undertake multi-state registrations. These programs 
establish uniform review standards and are designed to expedite the 
registration process, thereby potentially saving issuers time and 
money. Participation in such programs is voluntary and imposes no 
additional costs on issuers. The states have created coordinated 
review protocols for equity, small company and franchise offerings; 
direct participation program securities; and for certain offerings 
of securities pursuant to Regulation A. For more information on 
coordinated review programs, see http://www.nasaa.org/industry-resources/corporation-finance/coordinated-review/.
    \12\ For the period 2009 through 2014, 109,237 Forms D were 
filed, of which 1,409 reported an offering made in reliance upon 
Rule 505 of Regulation D, representing 1% of all offerings made in 
reliance upon Regulation D during this time period and 2% of all 
Regulation D offerings raising less than $5 million. During this 
same time period, 3,789 filings reported an offering made in 
reliance upon Rule 504, representing 3% of all offerings made in 
reliance upon Regulation D during this time period and 10% of all 
Regulation D offerings raising less than $1 million. The vast 
majority of Form D filings during this period reported an offering 
made in reliance on Rule 506.
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II. Proposed Amendments To Rule 147

A. Rationale for Proposed Amendments to Rule 147

    The proposed amendments to Rule 147 would establish a new 
Securities Act exemption for intrastate offerings of securities by 
companies doing business in-state, including offerings relying upon 
newly adopted and proposed crowdfunding provisions under state 
securities laws. The proposed amendments seek to modernize Rule 147, 
while retaining the underlying intrastate character of Rule 147 that 
permits companies to raise money from investors within their state 
pursuant to state securities laws without concurrently registering the 
offers and sales at the federal level.
    Securities Act Section 3(a)(11) provides an exemption from 
registration under the Securities Act for, ``[a]ny security which is 
part of an issue offered and sold only to persons resident within a 
single State or Territory, where the issuer of such security is a 
person resident and doing business within, or, if a corporation, 
incorporated by and doing business within, such State or Territory.'' 
\13\ In 1974, the Commission adopted Rule 147 under the Securities Act 
to provide objective standards for local businesses seeking to rely on 
Section 3(a)(11).\14\ The Rule 147 safe harbor was intended to provide 
assurances that the intrastate offering exemption would be used for the 
purpose Congress intended in enacting Section 3(a)(11), namely the 
local financing of companies by investors within the company's state or 
territory.\15\ Nothing in Rule 147 obviates

[[Page 69788]]

the need for compliance with any state law relating to the offer and 
sale of the securities\16\ and nothing in our proposed amendments would 
affect continued compliance with such laws.
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    \13\ 15 U.S.C. 77c(a)(11).
    \14\ SEC Rel. No. 33-5450 (Jan. 7, 1974) [39 FR 2353 (Jan. 21, 
1974)] (``Rule 147 Adopting Release''); SEC Rel. No. 33-5349 (Jan. 
8, 1973) [38 FR 2468 (Jan. 26, 1973)] (``Rule 147 Proposing 
Release'').
    \15\ See Rule 147 Adopting Release. See also H.R. Rep. No. 73-
85, at 6-7 (1933), H.R. Rep. No. 73-1838, at 40-41 (1934) (Conf. 
Rep.) and SEC Rel. No. 33-4434, at 4 (Dec. 6, 1961) [26 FR 11896 
(Dec. 13, 1961)] (``1961 Release'').
    \16\ See 17 CFR 230.147 (Preliminary Note 2).
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    Section 3(a)(11) and the Commission's Rule 147 safe harbor limit 
both offers and sales to residents of the same state or territory in 
which the issuer is resident and doing business. Rule 147 also includes 
prescriptive threshold requirements that an issuer must satisfy in 
order to be considered ``doing business'' in-state. To satisfy these 
requirements, an issuer must, among other things:
     Derive at least 80% of its consolidated gross revenues in-
state;
     have at least 80% of its consolidated assets in-state; and
     intend to use and use at least 80% of the net proceeds 
from an offering conducted pursuant to Rule 147 in connection with the 
operation on an in-state business or real property.\17\
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    \17\ 17 CFR 230.147(c)(2)(i)-(iii).
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    Market participants and commenters have indicated that the combined 
effect of Section 3(a)(11)'s statutory limitation on offers and the 
prescriptive threshold requirements of Rule 147 unduly limit the 
availability of the exemption for local companies that would otherwise 
conduct intrastate offerings.\18\ For example, market participants and 
commenters have noted that the use of the Internet for offerings makes 
it difficult for issuers to limit offers to in-state residents.\19\ 
These concerns, in addition to developments in communication 
technologies and the increasing interstate nature of small business 
activities that have occurred since Section 3(a)(11) was enacted and 
Rule 147 was originally adopted, suggest that the current limitations 
are in need of modernization.\20\
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    \18\ See note 10 above.
    \19\ See, e.g., Transcript of Record at 84, SEC Advisory 
Committee on Small and Emerging Companies (June 3, 2015).
    \20\ Rule 147 has not been substantively changed since it was 
adopted in 1974.
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    A number of states have adopted and/or enacted crowdfunding \21\ 
provisions in their rules or statutes, which may serve as another 
valuable tool small companies can use to raise capital.\22\ Other 
states have similar forms of state-based crowdfunding bills 
pending.\23\ State-based crowdfunding provisions generally require that 
an issuer, in addition to complying with various state-specific 
requirements to qualify for the exemption,\24\ also comply with Section 
3(a)(11) and Rule 147.\25\ The Commission has received feedback from 
state securities regulators and market participants, however, who have 
indicated that the current statutory requirements in Section 3(a)(11) 
and regulatory requirements in Rule 147 make it difficult for issuers 
to take advantage of these new state crowdfunding provisions.\26\
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    \21\ As the Commission noted in its proposing release for the 
rules implementing Title III of the JOBS Act, crowdfunding is a 
relatively new and evolving method to raise money using the 
Internet. Crowdfunding serves as an alternative source of capital to 
support a wide range of ideas and ventures. An entity or individual 
raising funds through crowdfunding typically seeks small individual 
contributions from a large number of people. See SEC Rel. No. 33-
9470 (Oct. 23, 2013) [79 FR 66428 (Nov. 5, 2013)].
    \22\ As of the date of this proposal, data from the North 
American Securities Administrators Association (``NASAA'') indicates 
that 29 states and the District of Columbia have enacted some form 
of a state-based crowdfunding exemption to state registration either 
through legislation, regulation or administrative orders. See notes 
7-8 above; see also Intrastate Crowdfunding Directory, NASAA, http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-resource-center/intrastate-crowdfunding-directory/.
    \23\ See, e.g., Intrastate Crowdfunding Legislation, prepared by 
NASAA, available at http://nasaa.cdn.s3.amazonaws.com/wp-content/uploads/2014/12/NASAA-Crowdfunding-Index_8-1-2015a1.pdf (summarizing 
the latest developments in intrastate crowdfunding, including the 
status of proposed state intrastate crowdfunding legislation and 
regulations).
    \24\ See, e.g., Ala. Code Sec.  8-6-11 (2014) (aggregate 
offering limits); Ariz. Rev. Stat. Ann. Sec.  44-1844 (2015) 
(investor limits); Fla. Stat. Sec. Sec.  571.021, 517.061, 517.0611, 
517.12, 517.121, 517.161, 626.9911 (2015) (audited financial 
statement requirements); Ind. Code Sec.  6-3.1-24-14 (2014) (state 
filing requirements); Ky. Rev. Stat. Ann. Sec. Sec.  292.410-292.415 
(2015) (delivery of a disclosure document).
    \25\ Of the 29 states and the District of Columbia that have 
adopted intrastate crowdfunding provisions, only Maine allows an 
issuer to rely upon a federal exemption other than a combination of 
Securities Act Section 3(a)(11) and Rule 147, namely the exemption 
provided by Rule 504 of Regulation D. See Me. Rev. Stat. tit. 32, 
Sec.  16304(6-A)(D) (2013).
    \26\ See note 18 above. See also Recommendation to the 
Commission by the Advisory Committee on Small and Emerging Companies 
(Sept. 23, 2015), available at http://www.sec.gov/info/smallbus/acsec/acsec-recommendation-modernize-rule-147.pdf.
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    The most common concerns expressed about Rule 147 are:
     The limitation of offers to in-state residents only, which 
raises questions about the proper use of the Internet for these 
offerings;
     The limitation of eligible issuers only to those that are 
incorporated or organized in-state, which excludes local issuers with 
local operations that incorporate or organize in a different state for 
business reasons; and
     The limitation of eligible issuers only to those that can 
satisfy each of the three 80% thresholds concerning their revenues, 
assets and use of net proceeds in order for the issuers to be deemed 
``doing business'' within a state or territory, which unduly restricts 
the local businesses that may rely upon the exemption for local 
financings in their home state or territory.\27\
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    \27\ Id.
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    The proposed amendments to Rule 147 would amend these requirements 
and revise the rule to allow an issuer to engage in any form of general 
solicitation or general advertising, including the use of publicly 
accessible Internet Web sites, to offer and sell its securities, so 
long as all sales occur within the same state or territory in which the 
issuer's principal place of business is located, and the offering is 
registered in the state in which all of the purchasers are resident or 
is conducted pursuant to an exemption from state law registration in 
such state that limits the amount of securities an issuer may sell 
pursuant to such exemption to no more than $5 million in a twelve-month 
period and imposes an investment limitation on investors. The proposed 
amendments would define an issuer's principal place of business as the 
location in which the officers, partners, or managers of the issuer 
primarily direct, control and coordinate the activities of the issuer 
and further require the issuer to satisfy at least one of four 
threshold requirements that would help ensure the in-state nature of 
the issuer's business.\28\ As proposed, certain provisions of existing 
Rule 147 regarding legends and mandatory disclosures to purchasers and 
prospective purchasers would continue to apply to offerings conducted 
pursuant to the exemption.\29\ In addition, any offer or sale under the 
proposed amendments to Rule 147 would need to comply with state 
securities laws.
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    \28\ See proposed Rule 147(c).
    \29\ See proposed Rule 147(f).
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B. Explanation of Proposed Amendments to Rule 147

    As noted above, Rule 147 was adopted as a safe harbor for 
compliance with Section 3(a)(11). Our proposed amendments to the rule, 
however, would allow an issuer to make offers accessible to out-of-
state residents and to be incorporated out-of-state, so long as sales 
are made only to in-state residents and the issuer's principal place of 
business is in-state and it satisfies at least one additional 
requirement that would further demonstrate the in-state nature of the 
issuer's business. As proposed, an issuer would only be able to avail 
itself of the

[[Page 69789]]

proposed exemption if the offering is registered in the state in which 
all of the purchasers are resident or is conducted pursuant to an 
exemption from state law registration in such state that limits the 
amount of securities an issuer may sell pursuant to such exemption to 
no more than $5 million in a twelve-month period and imposes an 
investment limitation on investors. Rule 147, as proposed to be 
amended, would no longer fall within the statutory parameters of 
Section 3(a)(11).\30\ Accordingly, we propose to amend Rule 147 to 
create an exemption pursuant to our general exemptive authority under 
Section 28 of the Securities Act.\31\ As amended, Rule 147 would 
function as a separate exemption from Securities Act registration 
rather than as a safe harbor under Section 3(a)(11).\32\ The proposed 
amendments, if adopted, would not alter the fact that the Section 
3(a)(11) statutory exemption continues to be a capital raising 
alternative for issuers with local operations seeking local financing.
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    \30\ Issuers that seek guidance on how to comply with Section 
3(a)(11) after the adoption of any final rules amending Rule 147, as 
proposed, would continue to be able to rely on judicial and 
administrative interpretive positions on Rule 147 issued prior to 
the effectiveness of any such final rules.
    \31\ 15 U.S.C. 77z-3.
    \32\ As noted above, our proposed amendments to Rule 147 are 
intended, in part, to facilitate the use of state-based crowdfunding 
statutes. Because many state statutes and rules require issuers to 
comply with the requirements of both Section 3(a)(11) and Rule 147, 
states should consider whether our proposed amendments to Rule 147 
would require additional amendments to their respective statutes or 
rules to allow issuers to comply with requirements at both the state 
and federal level.
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1. Elimination of Limitation on Manner of Offering
    To satisfy Section 3(a)(11) and the current Rule 147 safe harbor, 
all of the securities in an offering must be both offered and sold 
exclusively to residents of the state or territory in which the issuer 
is resident and doing business. While the language limiting offers and 
sales to in-state residents in the statute and rule is clear, the 
legislative history of Section 3(a)(11), its subsequent amendments, and 
prior Commission guidance have created some uncertainty as to the scope 
of permissible offers that may be made pursuant to the exemption.
    When Congress enacted Section 3(a)(11) in 1934, the legislative 
history stated, among other things, that ``a person who comes within 
the purpose of the exemption, but happens to use a newspaper for the 
circulation of his advertising literature, which newspaper is 
transmitted in interstate commerce, does not thereby lose the benefits 
of the exemption.'' \33\ Consistent with this statement, the Commission 
in 1937 released staff guidance on the nature of the Section 3(a)(11) 
exemption in the form of a letter from the Commission's General 
Counsel.\34\ In this letter, the General Counsel stated that, ``the so-
called `intrastate exemption' is not in any way dependent upon absence 
of use of the mails or instruments of transportation or communication 
in interstate commerce in the distribution.'' \35\ Rather, the letter 
explained that, so long as all the statutory requirements of the 
exemption are satisfied, such securities may be offered and sold 
through the mails and may even be delivered in interstate commerce to 
purchasers, if such purchasers, though resident, are temporarily out of 
the state. In this context, the letter further noted that securities 
exempt from registration pursuant to Section 3(a)(11) ``may be made the 
subject of general newspaper advertisement (provided the advertisement 
is appropriately limited to indicate that offers to purchase are 
solicited only from, and sales will be made only to, residents of the 
particular state involved).'' \36\
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    \33\ See H.R. Rep. No. 73-1838, at 40-41 (1934) (Conf. Rep.). 
Section 3(a)(11) initially was enacted as Securities Act Section 
5(c). When Congress enacted the Securities Exchange Act of 1934, it 
also amended the Securities Act, including revising and re-
designating Section 5(c) as Section 3(a)(11).
    \34\ See SEC Rel. No. 33-1459 (May 29, 1937) [11 FR 10958 (Sept. 
27, 1946)] (``1937 Letter of General Counsel'').
    \35\ Id.
    \36\ Id.
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    The Commission released further guidance on Section 3(a)(11) in 
1961 that restated the staff guidance in the 1937 Letter of General 
Counsel.\37\ In its 1961 Release, the Commission explained that in 
order ``[t]o give effect to the fundamental purpose of the exemption, 
it is necessary that the entire issue of securities shall be offered 
and sold to, and come to rest only in the hands of residents within the 
state. If any part of the issue is offered or sold to a non-resident, 
the exemption is unavailable not only for the securities so sold, but 
for all securities forming a part of the issue, including those sold to 
residents.'' \38\
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    \37\ See 1961 Release at 4.
    \38\ Id.; see also 1937 Letter of General Counsel (stating that 
Section 3(a)(11) is ``limited to case in which the entire issue of 
securities is offered and sold exclusively to residents of the state 
in question.'').
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    As noted above, however, market participants and commenters have 
indicated that Section 3(a)(11)'s statutory limitation on offers unduly 
limits the availability of the exemption, for example, by limiting the 
manner in which issuers may communicate with or locate potential in-
state investors over the Internet.\39\ Rule 147, as proposed to be 
amended, would require issuers to limit sales to in-state residents, 
but would no longer limit offers by the issuer to in-state 
residents.\40\ Accordingly, amended Rule 147 would permit issuers to 
engage in general solicitation and general advertising that could reach 
out-of-state residents in order to locate potential in-state investors 
using any form of mass media, including unrestricted, publicly 
available Web sites, to advertise their offerings, so long as all sales 
of securities so offered are made to residents of the state or 
territory in which the issuer has its principal place of business.
---------------------------------------------------------------------------

    \39\ See, e.g., notes 10 and 19 above.
    \40\ See proposed Rule 147(d).
---------------------------------------------------------------------------

    Given that amended Rule 147 would allow offers to be accessible by 
out-of-state residents, the proposed amendments would require an issuer 
to include a prominent disclosure on all offering materials used in 
connection with a Rule 147 offering, stating that sales will be made 
only to residents of the same state or territory as the issuer.\41\ 
This proposed disclosure requirement is intended to advise investors 
who are not residents of the state in which sales are being made that 
the intrastate offering would be unavailable to them.
---------------------------------------------------------------------------

    \41\ See proposed Rule 147(f)(3).
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Request for Comment
    1. Should we amend Rule 147 to eliminate the limitation on offers 
to in-state residents, as proposed? Why or why not? Please explain.
    2. Should we retain the existing safe harbor and create a new rule 
pursuant to our authority under Section 28 to reflect our proposed 
revisions? Why or why not? How would our proposed revisions interact 
with other recent rules adopted pursuant to the JOBS Act, if at all?
    3. Should we adopt the proposed disclosure requirement for all 
offering materials used in reliance on this rule? Why or why not? 
Should we require additional or different disclosure? If so, what 
language would be appropriate?
2. Elimination of Residence Requirement for Issuers
    Rule 147 currently requires issuers to be incorporated or organized 
under the laws of the state or territory in which

[[Page 69790]]

the intrastate offering is conducted.\42\ This requirement, while based 
on the language of Section 3(a)(11), is at odds with modern business 
practice in which issuers incorporate or organize in states other than 
the state or territory of their principal place of business, for 
example, to take advantage of well-established bodies of corporate or 
partnership law.\43\ We do not believe that locus of entity formation 
should affect the ability of an issuer to be considered ``resident'' 
for purposes of an intrastate offering exemption at the federal level. 
Given modern business practices, the current requirement may be 
unnecessarily restrictive and may limit the usefulness of the 
exemption.
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    \42\ See Rule 147(c)(1)(i) [17 CFR 230.147(c)(1)(i)]. For 
issuers such as general partnerships or other forms of business 
organizations that are not organized under any state or territorial 
law, Rule 147(c)(1)(ii) considers such issuers residents of the 
state or territory where the issuers' principal offices are located.
    \43\ For example, data provided by issuers in Form D filings 
with the Commission indicates that approximately 30% of issuers 
conducting Rule 504 offerings and 62% of issuers conducting either 
Rule 505 or Rule 506 offerings have a principal place of business in 
a state other than the issuer's state of incorporation or 
organization. See discussion in Section V below.
---------------------------------------------------------------------------

    Therefore, for corporations, limited partnerships, trusts, or other 
forms of business organizations, we propose to eliminate the current 
requirement of Rule 147 that limits the availability of the rule to 
issuers organized in the state in which an offering takes place.\44\ 
Our proposed amendments would expand the universe of eligible issuers 
by eliminating the current ``residence'' requirement, while continuing 
to require that an issuer have a sufficient in-state presence 
determined by the location of the issuer's principal place of 
business.\45\ In conjunction with the proposed requirement that all 
purchasers be in-state residents,\46\ we believe that requiring an 
issuer to have an in-state principal place of business and to satisfy 
at least one additional requirement that demonstrates the in-state 
nature of the issuer's business should adequately ensure the intrastate 
nature of the offering, such that state authorities can effectively 
regulate an issuer's activities and enforce states' securities laws for 
the protection of resident investors.
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    \44\ Rule 147(c)(1)(i).
    \45\ See proposed Rule 147(c)(1). See also discussion on 
principal place of business in Section II.B.3. below, and the 
related discussion of the proposed requirement that an issuer 
satisfy at least one of four threshold requirements in order to help 
ensure the in-state nature of its business.
    \46\ See discussion in Section II.B.1.
---------------------------------------------------------------------------

    The proposed amendments also would replace the current rule's 
``principal office'' requirement for an issuer, such as a general 
partnership or other form of business organization that is not 
organized under any state or territorial law,\47\ with the proposed 
``principal place of business'' requirement.\48\
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    \47\ Rule 147(c)(1)(ii).
    \48\ See proposed Rule 147(c)(1).
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Request for Comment
    4. Should we amend Rule 147 to eliminate the requirement that 
entities be incorporated or organized under the laws of the state in 
which the offering takes place, as proposed? Additionally, should we 
limit availability of the exemption to issuers organized or 
incorporated in the United States or one of its territories? Why or why 
not? Please explain.
    5. Should we amend Rule 147, as proposed, to eliminate the current 
issuer residence requirement, while continuing to require an issuer to 
have a principal place of business in the state in which an intrastate 
offer and sale takes place? Would this requirement, in conjunction with 
the additional proposed requirements for an issuer to demonstrate the 
in-state nature of its business \49\ and the requirement that all 
purchasers be in-state residents,\50\ adequately ensure the intrastate 
nature of the offering such that a state can effectively regulate an 
issuer's activities?
---------------------------------------------------------------------------

    \49\ See discussion in Section II.B.3 (Requirements for Issuers 
``Doing Business'' In-State) below.
    \50\ See note 46 above.
---------------------------------------------------------------------------

    6. In addition to requiring that an issuer have its principal place 
of business in the state where the offer and sale occurs, should we 
also require that the issuer be registered in-state as an out-of-state 
entity and/or that the issuer have obtained all licenses and 
registrations necessary to lawfully conduct business in-state? Why or 
why not?
3. Requirements for Issuers ``Doing Business'' In-State
    The Section 3(a)(11) intrastate offering exemption allows 
businesses to raise money within the state from investors who are more 
likely than those outside the state to be familiar with the issuer and 
its management. Accordingly, the doing business requirement of Section 
3(a)(11) has traditionally been viewed strictly.\51\ In adopting Rule 
147, the Commission adhered to the concepts in existing court and 
Commission interpretations of Section 3(a)(11) that not only should the 
issuer's business be physically located within the state, but the 
principal or predominant business must be carried on there \52\ and 
substantially all of the proceeds of the offering must be put to use 
within the state.\53\
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    \51\ Rule 147 Adopting Release at 3.
    \52\ Id. at 3, n. 4, citing, Chapman v. Dunn, 414 F.2d 153 (6th 
Cir. 1969). See also 1961 Release at 2 (``In view of the local 
character of the Section 3(a)(11) exemption, the requirement that 
the issuer be doing business in the state can only be satisfied by 
the performance of substantial operational activities in the state 
of incorporation. The doing business requirement is not met by 
functions in the particular state such as bookkeeping, stock record 
and similar activities or by offering securities in the state.'').
    \53\ Id. at 3, n.5, citing, SEC v. Truckee Showboat, Inc., 157 
F.Supp. 824 (S.D. Cal. 1957). See also 1961 Release at 2 (``If the 
proceeds of the offering are to be used primarily for the purpose of 
a new business conducted outside of the state of incorporation and 
unrelated to some incidental business locally conducted, the 
exemption should not be relied upon.'').
---------------------------------------------------------------------------

    Rule 147 followed these concepts by setting forth three 80% 
threshold tests for the issuer to be deemed ``doing business'' in-
state. Specifically, Rule 147(c)(2) deems an issuer to be doing 
business in-state if its principal office is located within the state 
and at least:
     80% of its consolidated gross revenues are derived from 
the operation of a business or of real property located in or from the 
rendering of services within such state or territory;
     80% of its consolidated assets are located within such 
state or territory; and
     80% of the net proceeds from the offering are intended to 
be used by the issuer, and are in fact used, in connection with the 
operation of a business or of real property, the purchase of real 
property located in, or the rendering of services within such state or 
territory.\54\
---------------------------------------------------------------------------

    \54\ 17 CFR 230.147(c)(2).
---------------------------------------------------------------------------

    We propose to simplify the doing business in-state determination by 
amending the current rule requirements so that an issuer's ability to 
rely on the rule would be based on the location of the issuer's 
principal place of business, as opposed to its ``principal office.'' 
\55\ For purposes of the rule, we propose to define the term 
``principal place of business'' to mean the location from which the 
officers, partners, or managers of the issuer primarily direct, control 
and coordinate the activities of the issuer.\56\ As defined, an issuer

[[Page 69791]]

would only be able to have a ``principal place of business'' within a 
single state or territory and would therefore only be able to conduct 
an offering pursuant to amended Rule 147 within that state or 
territory. Issuers also would be required to register the offering in 
the state in which all of the purchasers are resident, or rely on an 
exemption from registration that limits the amount of securities an 
issuer may sell pursuant to such exemption to no more than $5 million 
in a twelve-month period and imposes an investment limitation on 
investors.\57\
---------------------------------------------------------------------------

    \55\ See 17 CFR 230.147(c)(2)(iv). We note that the issuer's 
``principal place of business'' is conceptually consistent with the 
current rule's requirement that the ``principal office'' of the 
issuer be located within the state or territory of the offering. See 
proposed Rule 147(c)(1). See also related discussion on issuer 
residency requirements in Section II.B.2 and note 47 above.
    \56\ Proposed Rule 147(c)(1). The proposed principal place of 
business definition is consistent with the use of that term in 
Exchange Act Rule 3a71-3, 17 CFR 240.3a71-3, for cross-border 
security based swap dealing activity and the use of the term 
``principal office and place of business'' in Investment Advisers 
Act Rule 203A-3(c), 17 CFR 275.203A-3(c).
    \57\ See discussion in Section II.B.f (State Law Requirements) 
below.
---------------------------------------------------------------------------

    As discussed more fully in Section II.B.4.c below, we believe that 
our rules should continue to require that the securities sold in an 
intrastate offering in one state should have to come to rest within 
such state before sales are permitted to out-of-state residents.\58\ 
Consistent with this view, we propose to limit the ability of an issuer 
that has changed its principal place of business to conduct an 
intrastate offering in a different state until such time as the 
securities sold in reliance on the proposed exemption in the prior 
state have come to rest in that state.\59\ For these purposes, we 
propose that issuers that have changed their principal place of 
business after making sales in an intrastate offering pursuant to 
proposed Rule 147 would not be able to conduct an intrastate offering 
pursuant to proposed Rule 147 in another state for a period of nine 
months from the date of the last sale in the prior state, which is 
consistent with the duration of the resale limitation period specified 
in proposed Rule 147(e).\60\
---------------------------------------------------------------------------

    \58\ See 1961 Release at 4.
    \59\ See proposed Rule 147(e) (proposing to limit resales of a 
given security purchased in an offering pursuant to Rule 147 to out-
of-state residents for a nine-month period from the date such 
security is sold by the issuer).
    \60\ See Note 1 to proposed Rule 147(c)(1), specifying that an 
issuer that has previously conducted an intrastate offering pursuant 
to proposed Rule 147 may not conduct another intrastate offering 
pursuant to the exemption, based upon satisfaction of the principal 
place of business definition in a different state or territory, 
until the expiration of the time period specified in proposed Rule 
147(e), calculated on the basis of the date of the last sale in such 
offering.
---------------------------------------------------------------------------

    Additionally, we propose to require issuers to satisfy an 
additional criterion that we believe would provide further assurance of 
the in-state nature of the issuer's business within the state in which 
the offering takes place. For these purposes, we propose to retain the 
80% threshold tests of the current rule in modified form with the 
addition of an alternative test based on the location of a majority of 
the issuer's employees.\61\ While the substance of the 80% threshold 
requirements of current Rule 147(c)(2) would be retained in the 
proposed rules, we propose to make compliance with any one of the 80% 
threshold requirements sufficient to demonstrate the in-state nature of 
the issuer's business. This would be a change to the current test, 
which requires issuers to meet all three conditions. We further propose 
to make certain technical revisions to the existing 80% thresholds that 
would simplify the structure, and clarify the application, of the 
rules.\62\ In light of our proposal to require issuers to satisfy only 
one of the threshold tests, we propose to eliminate the current 
provision in Rule 147(c)(2)(i)(B), which does not apply the revenue 
test to issuers with less than $5,000 in revenue during the prior 
fiscal year.\63\ While this accommodation may be reasonable in the 
context of the current conjunctive 80% threshold requirements of Rule 
147(c)(2), we do not believe it would be necessary under the proposed 
rule. We further propose to add an alternative requirement to the three 
modified 80% threshold requirements that relates to the location of a 
majority of the issuer's employees. This proposed requirement would 
provide an additional method by which an issuer could demonstrate that 
it conducts in-state business sufficient to justify reliance on Rule 
147, as proposed to be amended. For these purposes, we propose to 
permit an issuer to satisfy the requirement of proposed Rule 147(c)(2) 
by having a majority of its employees based in such state or 
territory.\64\ We believe that these proposed requirements would not 
only provide important indicia of the in-state nature of the issuer's 
business, but also would provide issuers with additional flexibility to 
satisfy the proposed requirements, especially in light of the different 
roles employees play within smaller companies and the different 
locations at which such roles are carried out.
---------------------------------------------------------------------------

    \61\ See proposed Rule 147(c)(2).
    \62\ For example, in order to streamline the presentation of 
proposed Rule 147(c)(2), we propose to redesignate current Rule 
147(c)(2)(i)(A)-(B), 17 CFR 230.147(c)(2)(i)(A)-(B), which includes 
instructions on how to calculate revenue under Rule 147(c)(2)(i), as 
a note to the rule.
    \63\ 17 CFR 230.147(c)(2)(i)(B).
    \64\ See proposed Rule 147(c)(2)(iv).
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    As proposed, and in addition to the requirement that an issuer have 
its principal place of business in-state, an issuer would be required 
to meet at least one of the following requirements:
     The issuer derived at least 80% of its consolidated gross 
revenues from the operation of a business or of real property located 
in or from the rendering of services within such state or territory; 
\65\
---------------------------------------------------------------------------

    \65\ See proposed Rule 147(c)(2)(i) and related notes to the 
rule indicating how and when an issuer would calculate its revenue 
for purposes of compliance with the proposed rule, based on when the 
first offer of securities is made pursuant to the exemption.
---------------------------------------------------------------------------

     The issuer had at the end of its most recent semi-annual 
fiscal period prior to the first offer of securities pursuant to the 
exemption, at least 80% of its consolidated assets located within such 
state or territory; \66\
---------------------------------------------------------------------------

    \66\ See proposed Rule 147(c)(2)(ii).
---------------------------------------------------------------------------

     The issuer intends to use and uses at least 80% of the net 
proceeds to the issuer from sales made pursuant to the exemption in 
connection with the operation of a business or of real property, the 
purchase of real property located in, or the rendering of services 
within such state or territory; \67\ or
---------------------------------------------------------------------------

    \67\ See proposed Rule 147(c)(2)(iii).
---------------------------------------------------------------------------

     A majority of the issuer's employees are based in such 
state or territory.\68\
---------------------------------------------------------------------------

    \68\ See proposed Rule 147(c)(2)(iv).
---------------------------------------------------------------------------

    We believe the proposed amendments would expand capital raising 
opportunities for companies while continuing to require them to have an 
in-state presence sufficient to justify reliance on the exemption. 
Given the increasing ``interstate'' nature of small business 
activities, it has become increasingly difficult for companies, even 
smaller companies that are physically located within a single state or 
territory, to satisfy all of the residence requirements of current Rule 
147(c)(2).\69\ The proposed modification of these requirements would 
facilitate the use of the exemption for capital raising by providing 
issuers with greater flexibility to comply with the requirements and 
would help to eliminate potential uncertainty about the availability of 
the exemption.\70\ If we were to adopt a final rule, we expect the 
staff would undertake to study and submit a report to the Commission no 
later than three years following the effective date of the amendments 
on whether this framework appropriately provides assurances that an 
issuer is doing business in the state in which the offering takes 
place. The Commission

[[Page 69792]]

could also independently decide to engage in a retrospective review of 
the rule at any time.
---------------------------------------------------------------------------

    \69\ See discussion in Section V below.
    \70\ See, e.g., Transcript of Record 82-91, SEC Advisory 
Committee on Small and Emerging Companies (June 3, 2015); see also 
Exempted Transactions Under the Securities Act of 1933, J. William 
Hicks, Thomas Reuters/West (2009), Ch. 4 (Intrastate Offerings Under 
Section 3(a)(11)) at Sec.  4:66 (noting confusion and uncertainty in 
the application of Rule 147's objective standards to specific 
factual situations).
---------------------------------------------------------------------------

    In addition, states could decide whether to adopt specific 
additional requirements not specifically contemplated in this proposal 
that are consistent with their respective interests in facilitating 
capital formation and protecting their resident investors in intrastate 
securities offerings within their jurisdiction.\71\ If we were to adopt 
a rule in substantially the form proposed today, we believe that states 
that currently have statutes and/or rules that require compliance with 
Securities Act Section 3(a)(11) and Rule 147 would need to amend their 
provisions in order for issuers to fully avail themselves of the new 
rule.\72\ We further believe that, in connection with any such 
amendment to their statutes and/or rules, states could consider whether 
any additional requirements should be adopted at the state level to 
regulate local offerings within their jurisdiction and provide 
additional investor protections.
---------------------------------------------------------------------------

    \71\ States currently employ this approach to varying degrees in 
their respective state crowdfunding statutes. See, e.g., DC Mun. 
Regs. tit. 26-B, Sec.  250 (2014) (escrow required until minimum 
offering amount satisfied), Ind. Code Sec.  6-3.1-24-14 (2014) 
(funding portal required). See discussion in Section II.B.f below 
for specific state law requirements for reliance on the proposed 
exemption.
    \72\ See note 25 and related discussions in Section II.A above 
and Section II.B.f below.
---------------------------------------------------------------------------

Request for Comment
    7. Should we amend Rule 147 as proposed to require an issuer to 
have an in-state principal place of business and satisfy at least one 
of four alternative requirements that demonstrate the in-state nature 
of the issuer's business? Why or why not?
    8. As proposed, should we limit the ability of issuers that have 
previously conducted an intrastate offering in reliance on proposed 
Rule 147, but that have since changed their principal place of 
business, to conduct an offering in reliance on the proposed rule in a 
different state until all of the securities sold in a prior intrastate 
offering have come to rest in the state in which the previous offering 
took place? Why or why not? Or, would the integration provisions of 
proposed Rule 147(g) sufficiently prevent an issuer from conducting two 
intrastate offerings pursuant to proposed Rule 147 within a short 
period of time, such that the proposed limitation would not be 
necessary? Should the proposed limitation be longer (e.g., 12 months)? 
Why or why not?
    9. Should we modify, as proposed, the current 80% threshold 
requirements of Rule 147(c)(2)(i)-(iii) to no longer require an issuer 
to satisfy all of the thresholds and include an alternative requirement 
based on the location of a majority of the issuer's employees? Why or 
why not? If not, should we retain the current threshold requirements 
for an issuer to be deemed ``doing business'' within a state or 
territory, but at lower percentage thresholds? If so, please specify 
the appropriate percentage thresholds. Or should we use different 
alternative threshold tests than under the current or proposed rules? 
Please explain.
    10. As proposed, if we retain the threshold requirements in 
modified form, should issuers only be required to meet one or more of 
the requirements? Should they be required to meet two or more of the 
requirements? Please explain.
    11. Do the proposed 80% threshold requirements provide sufficient 
guidance to issuers as to how to comply with such requirements? If not, 
what additional guidance, rules or revisions to the proposed rules 
should the Commission provide to clarify compliance with the proposed 
requirements?
    12. Is the proposed alternative requirement that an issuer have 
derived at least 80% of its consolidated gross revenues in-state an 
appropriate indicator of in-state business activities for purposes of 
an issuer's eligibility for the proposed exemption? Does this 
alternative requirement provide sufficient clarity for issuers that 
would seek to comply with it? As proposed, should this requirement 
continue to require an issuer to calculate gross revenue on a 
consolidated basis? Please explain.
    13. Is the proposed alternative requirement that the issuer had, at 
the end of its most recent semi-annual fiscal period prior to an 
initial offer of securities in any offering or subsequent offering 
pursuant to the exemption, at least 80% of its consolidated assets 
located in-state an appropriate indicator of in-state business 
activities for purposes of an issuer's eligibility for the proposed 
exemption? Does this alternative requirement provide sufficient clarity 
for issuers that would seek to comply with it? As proposed, should this 
requirement continue to require an issuer to calculate assets by 
including the assets of its subsidiaries on a consolidated basis? 
Please explain.
    14. Is the proposed alternative requirement that the issuer intend 
to use and use at least 80% of the net proceeds from sales made 
pursuant to the exemption in connection with the operation of a 
business or of real property, the purchase of real property located in, 
or the rendering of services within such state or territory an 
appropriate indicator of in-state business activities for purposes of 
an issuer's eligibility for the proposed exemption? Does this 
alternative requirement provide sufficient clarity for issuers that 
would seek to comply with it? Please explain.
    15. As proposed, and in addition to the proposed alternative 80% 
threshold requirements, should we add an alternative threshold 
requirement based on the location of a majority of an issuer's 
employees? Why or why not?
    16. In addition to the requirement in proposed Rule 147(c)(1) that 
an issuer have a principal place of business in-state, does the 
proposed requirement that an issuer be able to satisfy the requirements 
of proposed Rule 147(c)(2) by having a majority of its employees based 
in such state or territory provide a sufficient basis to determine the 
in-state nature of the issuer's business? Why or why not? If not, what 
additional or alternative criteria could we add to the proposed 
requirement to provide a sufficient basis?
    17. As proposed, should we limit availability of the exemption to 
those issuers that can satisfy the proposed ``principal place of 
business'' definition and at least one of the additional requirements 
of proposed Rule 147(c)(2) that would demonstrate the in-state nature 
of the issuer's business? Why or why not? Please explain.
    18. Is our proposed definition of ``principal place of business'' 
appropriate? Why or why not? Would the proposed definition of 
``principal place of business'' alone adequately establish in-state 
status for purposes of determining eligibility to conduct an offering 
pursuant to the exemption at the federal level? Are there any 
additional or alternative requirements that should be included in the 
rule to establish in-state status?
4. Additional Amendments to Rule 147
a. Reasonable Belief as to Purchaser Residency Status
    Current Rule 147(d) requires that offers and sales of securities 
pursuant to the rule be made only to persons resident within the state 
or territory of which the issuer is a resident.\73\ Regardless of the 
efforts an issuer takes to determine that potential investors are 
residents of the state in which the issuer is a resident, the exemption 
would be

[[Page 69793]]

lost for the entire offering if securities are offered or sold to one 
investor that was not in fact a resident of the state. We believe that 
this requirement in the current rule is unnecessarily restrictive and 
gives rise to uncertainty for issuers. We therefore believe it should 
be changed in the amended rule.
---------------------------------------------------------------------------

    \73\ 17 CFR 230.147(d).
---------------------------------------------------------------------------

    Consistent with the requirements in Regulation D,\74\ we propose to 
add a reasonable belief standard to the issuer's determination as to 
the residence of the purchaser at the time of the sale of the 
securities.\75\ As proposed, an issuer would satisfy the requirement 
that the purchaser in the offering be a resident of the same state or 
territory as the issuer's principal place of business by either the 
existence of the fact that the purchaser is a resident of the 
applicable state or territory, or by establishing that the issuer had a 
reasonable belief that the purchaser of the securities in the offering 
was a resident of such state or territory.\76\ We believe that 
permitting issuers to sell on the basis of a reasonable belief of a 
purchaser's in-state residency status will increase the utility of the 
exemption by providing issuers with additional certainty about the 
availability of the exemption.
---------------------------------------------------------------------------

    \74\ Rule 501(a) of Regulation D includes in the definition of 
``accredited investor,'' persons who come within the enumerated 
categories of the rule, or who the issuer reasonably believes come 
within any of such categories, at the time of sale to such person. 
[17 CFR 230.501(a)].
    \75\ See proposed Rule 147(d).
    \76\ Id.
---------------------------------------------------------------------------

    Consistent with our proposal to permit issuers to satisfy the 
purchaser residency requirement by establishing a reasonable belief 
that such purchasers are in-state residents, we propose to eliminate 
the current requirement in Rule 147 that issuers obtain a written 
representation from each purchaser as to his or her residence.\77\ We 
believe that this requirement is unnecessary in light of the proposed 
reasonable belief standard. In the context of the current intrastate 
exemption, the Commission has previously indicated that ``[t]he mere 
obtaining of formal representations of residence . . . should not be 
relied upon without more as establishing the availability of the 
exemption.'' \78\ Whether an issuer has formed a reasonable belief that 
the prospective purchaser is an in-state resident would need to be 
determined on the basis of all facts and circumstances. Such facts and 
circumstances could include, but would not be limited to, for example, 
a pre-existing relationship between the issuer and the prospective 
purchaser that provides the issuer with sufficient insight and 
knowledge as to the prospective purchaser's primary residence so as to 
enable the issuer to establish a reasonable basis to believe that the 
prospective purchaser is an in-state resident. An issuer may also 
consider other facts and circumstances establishing the residency of a 
prospective purchaser, such as evidence of the home address of the 
prospective purchaser as documented by a recently dated utility bill, 
pay-stub, information contained in state or federal tax returns, or any 
state-issued documentation, such as a driver's license or 
identification card.
---------------------------------------------------------------------------

    \77\ 17 CFR 230.147(f)(1)(iii).
    \78\ See 1961 Release at 3.
---------------------------------------------------------------------------

    Additionally, we are concerned that maintaining the current 
requirement for an issuer to obtain a written representation from 
purchasers of in-state residency status may cause confusion with the 
proposed reasonable belief standard. Issuers, particularly smaller 
issuers likely to conduct intrastate offerings, may mistakenly believe 
that obtaining a written representation from purchasers of in-state 
residency status would, without more, be sufficient to establish a 
reasonable belief that such purchasers are in-state residents, which, 
as noted above, would not be the case. For these reasons, we propose to 
eliminate the requirement that issuers obtain a written representation 
from purchasers as to their in-state residency. We are, however, 
seeking comment on whether this requirement should be retained.
Request for Comment
    19. Should we add a reasonable belief standard to the issuer's 
determination as to the residence of the purchaser at the time of the 
sale of the securities, as proposed? Why or why not?
    20. Should we eliminate the requirement to obtain a written 
representation from the purchaser, as proposed? Why or why not? 
Alternatively, should we retain the requirement to obtain a written 
representation but supplement it with a reasonable belief standard? Why 
or why not? What additional benefit, if any, would be provided by 
supplementing the current written representation requirement with a 
reasonable belief standard?
    21. Should the rules provide a safe harbor for determining an 
individual purchaser's residence, based upon certain objective 
criteria, such as: (1) The jurisdiction in which a person owns or 
leases its primary home, (2) the jurisdiction in which a person 
maintains certain other indicia of residence (such as a driver's 
license, voting registration, tax situs), or (3) the jurisdiction in 
which a person's principal occupation is based? Why or why not? Are 
there other criteria that should be used to establish such a safe 
harbor?
b. Residence of Entity Purchasers
    The proposed amendments also would define the residence of a 
purchaser that is a legal entity, such as a corporation, partnership, 
trust or other form of business organization, as the location where, at 
the time of the sale, the entity has its principal place of 
business.\79\ The proposed amendments define a purchaser's ``principal 
place of business,'' consistent with the proposed definition for issuer 
eligibility purposes, as the location in which the officers, partners, 
or managers of the entity primarily direct, control and coordinate the 
activities of the issuer.\80\
---------------------------------------------------------------------------

    \79\ See proposed Rule 147(d). Under the current rule, an entity 
is a resident of the state or territory where the entity has its 
``principal office.'' We have not defined ``principal office.'' Rule 
147(c)(2)(iv) [17 CFR 230.147(c)(2)(iv)].
    \80\ See proposed Rule 147(c)(1).
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Request for Comment
    22. Should we define the residence of a purchaser that is a legal 
entity, such as a corporation, partnership, trust or other form of 
business organization, as the location where, at the time of the sale, 
the entity has its principal place of business? Why or why not? Should 
we define principal place of business differently for this purpose? If 
so, how should we define it?
    23. Current Rule 147(d)(3) provides that an entity organized for 
the specific purpose of acquiring the securities offered pursuant to 
the rule is not treated as a resident of the state or territory unless 
all of the beneficial owners of such organization are also residents of 
such state or territory.\81\ Should we revise the rule to base the test 
upon the location of the principal place of business of the specific 
purpose entity, as opposed to the residency of all of its beneficial 
owners? Why or why not?
---------------------------------------------------------------------------

    \81\ 17 CFR 230.147(d)(3).
---------------------------------------------------------------------------

c. Limitation on Resales
    Under current Rule 147(e), ``during the period in which securities 
that are part of an issue are being offered and sold by the issuer, and 
for a period of nine months from the date of the last sale by the 
issuer of such securities, all resales of any part of the issue, by any 
person, shall be made only to persons resident within such state or 
territory.'' \82\ The limitation on resales in Rule 147(e), which is 
also a condition that must be satisfied in order for the

[[Page 69794]]

issuer to be able to rely on the safe harbor,\83\ is designed to help 
ensure that the securities issued in an intrastate offering have come 
to rest in the state of the offering before any potential 
redistribution out-of-state.\84\ While this requirement may be 
appropriate for purposes of compliance with a safe harbor under Section 
3(a)(11), we believe it is unduly restrictive \85\ and that its 
application in Rule 147 can give rise to uncertainty for issuers in the 
offering process by conditioning the availability of the safe harbor on 
circumstances beyond the issuer's control. We therefore propose to 
amend both the substance and application of Rule 147(e).
---------------------------------------------------------------------------

    \82\ 17 CFR 230.147(e).
    \83\ See Rule 147(a), 17 CFR 230.147(a).
    \84\ See 1961 Release at 3.
    \85\ For example, in an offering of securities that takes an 
issuer one year to complete, a purchaser of securities on day one of 
the offering must wait twenty-one months before it is able to resell 
to an investor out-of-state, while the last purchaser in such 
offering would only be required to wait for a period of nine months 
before similarly being able to sell to out-of-state purchasers.
---------------------------------------------------------------------------

    As the Commission previously noted when discussing resales pursuant 
to Section 3(a)(11), the requirement that the entire distribution of 
securities pursuant to the intrastate exemption be offered and sold to 
in-state residents should not be read to suggest ``that securities 
which have actually come to rest in the hands of resident investors, 
such as persons purchasing without a view to further distribution or 
resale to non-residents, may not in due course be resold by such 
persons, whether directly or through dealers or brokers, to non-
residents without in any way affecting the exemption.'' \86\
---------------------------------------------------------------------------

    \86\ 1961 Release, at 4.
---------------------------------------------------------------------------

    The Commission's approach in the 1961 Release reflects the view 
that the determination as to when a given purchase of securities in an 
intrastate offering has come to rest in-state depends less on a defined 
period of time after the final sale by the issuer in such offering than 
it does on whether a resident purchaser--that seeks to resell any 
securities purchased in such an offering--has taken the securities 
``without a view to further distribution or resale to non-residents.'' 
\87\ In this regard, we believe that a time-based limitation on 
potential resales to non-residents of securities purchased in an 
intrastate offering that relates back to the date of the initial 
purchase by a resident investor from the issuer would more precisely 
address the concern regarding out-of-state resales.\88\
---------------------------------------------------------------------------

    \87\ Id.
    \88\ Id. (``[i]f the securities are resold but a short time 
after their acquisition to a non-resident this fact, although not 
conclusive, might support an inference that the original offering 
had not come to rest in the state . . .''). The Commission 
previously has taken a time-based holding period approach, for 
example, in Securities Act Rule 144, regarding resales of restricted 
securities issued in private offerings in order to help ensure that 
resellers of the securities are not engaged in a distribution of 
securities and, therefore, not considered underwriters of the 
securities issued under the definition of such term in Securities 
Act Section 2(a)(11).
---------------------------------------------------------------------------

    For these reasons, we propose to amend the limitation on resales in 
Rule 147(e) to provide that ``for a period of nine months from the date 
of the sale by the issuer of a security sold pursuant to this rule, any 
resale of such security by a purchaser shall be made only to persons 
resident within such state or territory, as determined pursuant to 
paragraph (d) of this rule.'' \89\ We believe that a nine-month 
limitation on resales by resident purchasers to non-residents would 
adequately ensure that the securities purchased by such residents were 
purchased without a view to further distribution to non-residents.\90\
---------------------------------------------------------------------------

    \89\ Proposed Rule 147(e).
    \90\ In such circumstances, resales of securities that were 
initially purchased in an intrastate offering must themselves be 
registered or exempt from registration in any state in which such 
resale takes place.
---------------------------------------------------------------------------

    Additionally, as mentioned above, the application of Rule 147(e) in 
the context of the Section 3(a)(11) safe harbor may give rise to 
uncertainty in the offering process that we propose to address in the 
amended rules. Currently, Rule 147(a) requires issuers to comply with 
all of the terms and conditions of the rule in order for an offering to 
come within the safe harbor.\91\ This provision makes the safe harbor 
unavailable to an issuer for the entire offering if, regardless of the 
efforts the issuer takes to ensure that secondary sales comply with the 
resale limitations, \92\ securities are sold in the secondary market 
before the expiration of the resale period to a person that is not in 
fact an in-state resident. The application of Rule 147(e) in the 
overall scheme of the safe harbor can therefore cause uncertainty for 
issuers during, and for a period of nine months after the completion 
of, the offering about whether the safe harbor is or continues to be 
available based on circumstances outside of the issuer's control.\93\
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    \91\ Rule 147(a), 17 CFR 230.147(a).
    \92\ See, e.g., Rule 147(f) (requiring legends and stop transfer 
instructions to the issuer's transfer agent).
    \93\ See, e.g., Exempted Transactions Under the Securities Act 
of 1933, at Sec.  4:52. See also Section II.B.3 above, discussing 
related concerns regarding the uncertainty interjected into the 
offering process by the current 80% requirement as to the issuer's 
in-state use of proceeds in Rule 147(c)(2)(iii).
---------------------------------------------------------------------------

    While we propose to maintain the resale limitations in Rule 147(e), 
in the modified form discussed above, we also propose to amend Rule 
147(b) so that an issuer's ability to rely on Rule 147 would no longer 
be conditioned on a purchaser's compliance with Rule 147(e).\94\ We 
believe that this proposed amendment to the application of Rule 147(e), 
as it relates to Rule 147(b), would increase the utility of the 
exemption by eliminating the uncertainty created in the offering 
process for issuers under the current rules. Additionally, we do not 
believe that eliminating this uncertainty would result in an increased 
risk of issuer non-compliance with the rules because, as proposed, 
issuers would remain subject to requirements relating to, for example, 
in-state sales limitations, and legend, stop transfer instructions for 
transfer agents, and offeree and purchaser disclosures, in order to 
satisfy the exemption at the federal level. In addition, issuers would 
continue to be subject to the antifraud and civil liability provisions 
of the federal securities laws, as well as state securities law 
requirements.
---------------------------------------------------------------------------

    \94\ See proposed Rule 147(b). As proposed, current Rule 147(a) 
would be re-designated as Rule 147(b).
---------------------------------------------------------------------------

Request for Comment
    24. Should we amend the rule, as proposed, to impose a limitation 
on resales by resident purchasers to non-residents based on the date of 
sale by the issuer to the relevant purchaser rather than based on the 
date when the offering terminates? Why or why not?
    25. Is the proposed nine-month period appropriate? Should it be 
longer or shorter? If so, what would be the appropriate amount of time 
(e.g., six months, one year, etc.)?
    26. Instead of adopting the limitation on resales proposed in Rule 
147(e), should securities issued under amended Rule 147 be considered 
``restricted securities'' under Rule 144(a)(3)? \95\ Or is the purpose 
underlying the limitation on resales in Rule 147 (i.e., that the 
securities must come to rest in-state before sales to out-of-state 
residents are permitted) sufficiently distinct from the purpose 
underlying the limitation on resales of restricted securities such that 
securities issued in a Rule 147 transaction should not be considered 
restricted securities? Why or why not?
---------------------------------------------------------------------------

    \95\ 17 CFR 230.144(a)(3).
---------------------------------------------------------------------------

    27. As proposed, should we no longer condition an issuer's ability 
to satisfy Rule 147 on investor compliance with Rule 147(e)? Why or why 
not? Are there any risks to investors posed by the proposed revisions 
to Rule 147(b) that would no longer condition the

[[Page 69795]]

availability of the rule on an issuer's compliance with Rule 147(e)?
d. Integration
    The integration safe harbor of current Rule 147(b)(2) provides that 
offers or sales of securities that take place either prior to the six-
month period immediately preceding, or after the six-month period 
immediately following, any Rule 147 offering will not be integrated 
with any offers or sales of securities by the issuer made in reliance 
on the safe harbor.\96\ For offers or sales of securities occurring 
within the six-month period immediately before or after any offers or 
sales pursuant to a Rule 147 offering, Preliminary Note 3 to the rule 
states that the determination of whether offers and sales of securities 
are deemed part of the same issue, or should be deemed ``integrated,'' 
is a question of fact that will depend on the particular 
circumstances.\97\
---------------------------------------------------------------------------

    \96\ 17 CFR 230.147(b)(2); see also Rule 147 Adopting Release at 
3.
    \97\ See 17 CFR 230.147 (Preliminary Note 3). Preliminary Note 3 
cites to the guidance provided in Release. No. 33-4552, at 3 (Nov. 
6, 1962) [27 FR 11316 (Nov. 16, 1962)], in which the Commission 
describes the traditional five-factor test for integration, and 
explains that ``any one or more of the following factors may be 
determinative of the question of integration:
     1. are the offerings part of a single plan of financing;
     2. do the offerings involve issuance of the same class of 
security;
     3. are the offerings made at or about the same time;
     4. is the same type of consideration to be received; and
     5. are the offerings made for the same general purpose.''
---------------------------------------------------------------------------

    Integration safe harbors provide issuers, particularly smaller 
issuers whose capital needs often change, with valuable certainty about 
their eligibility to comply with an exemption from Securities Act 
registration.\98\ We believe that, while the existing Rule 147 safe 
harbor provides issuers with some certainty with respect to the 
integration of offers or sales of securities within the six-month 
period immediately preceding and following a Rule 147 offering, amended 
Rule 147 should reflect the Commission's most recent statements on the 
subject.\99\
---------------------------------------------------------------------------

    \98\ See 2015 Regulation A Release at Section II.B.5. 
(Integration).
    \99\ Id.
---------------------------------------------------------------------------

    The concept of integration has evolved since the adoption of Rule 
147 in 1974,\100\ particularly as it relates to the integration of 
potential offers and sales that occur concurrently with, or close in 
time with the particular exempt offering being considered.\101\ We 
therefore propose to update the rule's integration provisions by 
expanding the scope of the current provision in a manner that is 
consistent with the Commission's most recently adopted integration safe 
harbor, Rule 251(c) of Regulation A.\102\ We believe that this approach 
to integration would not only benefit issuers, particularly smaller 
issuers, by providing valuable certainty as to the availability of an 
exemption for a given offering, but that such issuers would also 
benefit from increased consistency in the application of the 
integration doctrine among the exemptive rules available to smaller 
issuers.\103\
---------------------------------------------------------------------------

    \100\ At the time the Commission adopted Rule 147, the 
Commission generally deemed intrastate offerings to be 
``integrated'' with those registered or private offerings of the 
same class of securities made by the issuer at or about the same 
time. Paragraph (b) of Rule 147 was intended to create greater 
certainty and to eliminate in certain situations the need for a 
case-by-case determination of when certain intrastate offerings 
should be integrated with other offerings, such as those registered 
under the Act or made pursuant to the exemption provided by Section 
3 or 4(a)(2) of the Act. See Rule 147 Adopting Release at 3.
    \101\ See e.g., Rule 251(c) of Regulation A [17 CFR 230.251(c)]; 
2015 Regulation A Release, at Section II.B.5.; SEC Rel. No. 33-8828, 
Section II.C.1 (Aug. 3, 2007) [72 FR 45116 (Aug. 10, 2007)]; Rule 
701 [17 CFR 230.701].
    \102\ See 17 CFR 230.251(c). Rule 251(c) was originally adopted 
as an integration safe harbor in 1992. See SEC Rel. No. 33-6949 
(July 30, 1992) [57 FR 36442 (Aug. 13, 1992)]. The 2015 Regulation A 
Release did not substantively change Rule 251(c), except for the 
addition to the safe harbor list of subsequent offers or sales of 
securities issued pursuant to Securities Act Section 4(a)(6). See 
Rule 251(c)(2)(vi).
    \103\ See Rule 251(c) of Regulation A [17 CFR 230.251(c)]; Rule 
701 [17 CFR 230.701].
---------------------------------------------------------------------------

    The proposed Rule 147 safe harbor would include any prior offers or 
sales of securities by the issuer, as well as certain subsequent offers 
or sales of securities by the issuer occurring within six months after 
the completion of an offering exempted by Rule 147. As proposed, offers 
and sales made pursuant to Rule 147 would not be integrated with:
     Prior offers or sales of securities; or
     Subsequent offers or sales of securities that are:
     Registered under the Act, except as provided in Rule 
147(h);
     Exempt from registration under Regulation A (17 CFR 
230.251 et seq.);
     Exempt from registration under Rule 701 (17 CFR 230.701);
     Made pursuant to an employee benefit plan;
     Exempt from registration under Regulation S (17 CFR 
230.901 through 230.905);
     Exempt from registration under section 4(a)(6) of the Act 
(15 U.S.C. 77d(a)(6)); or
     Made more than six months after the completion of an 
offering conducted pursuant to this rule.\104\
---------------------------------------------------------------------------

    \104\ See proposed Rule 147(g).
---------------------------------------------------------------------------

    As with Rule 251(c) of Regulation A, the proposed safe harbor from 
integration provided by proposed Rule 147(g) would expressly provide 
that any offer or sale made in reliance on the rule would not be 
integrated with any other offer or sale made either before the 
commencement of, or more than six months after, the completion of the 
Rule 147 offering. In other words, for transactions that fall within 
the scope of the safe harbor, issuers would not have to conduct an 
independent integration analysis of the terms of any offering being 
conducted under the provisions of another rule-based exemption in order 
to determine whether the two offerings would be treated as one for 
purposes of qualifying for either exemption. This bright-line rule 
would assist issuers, particularly smaller issuers, in analyzing 
certain transactions, but would not address the issue of potential 
offers or sales that occur concurrently with, or close in time after, a 
Rule 147 offering.
    Consistent with the current integration guidance in Preliminary 
Note 3 to Rule 147, our proposed amendments would clarify that, if the 
safe harbor does not apply, whether subsequent offers and sales of 
securities would be integrated with any securities offered or sold 
pursuant to this rule would depend on the particular facts and 
circumstances. There would be no presumption that offerings outside the 
integration safe harbors should be integrated.
    An offering made in reliance on Rule 147 would not be integrated 
with another exempt offering made concurrently by the issuer, provided 
that each offering complies with the requirements of the exemption that 
is being relied upon for the particular offering.\105\ For example, an 
issuer conducting a concurrent exempt offering for which general 
solicitation is not permitted would need to be satisfied that 
purchasers in that offering were not solicited by means of the offering 
made in reliance on amended Rule 147.\106\

[[Page 69796]]

Alternatively, an issuer conducting a concurrent exempt offering for 
which general solicitation is permitted would need to comply with the 
legend and disclosure requirements of proposed Rule 147(f).\107\ If the 
concurrent exempt offering for which general solicitation is permitted 
imposes additional restrictions on the general solicitation, such as, 
for example, the limitations imposed on advertising pursuant to Rule 
204 of Regulation Crowdfunding, the issuer's general solicitation would 
not be able to go beyond the more restrictive requirements. Also, an 
issuer conducting a concurrent Rule 506(c) offering could not include 
in its Rule 506(c) general solicitation materials an advertisement of a 
concurrent Rule 147 offering, unless that advertisement also included 
the necessary disclosure for, and otherwise complied with, Rule 
147(f).\108\
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    \105\ We adopted a similar approach to integration in the 
context of offerings under Regulation A. See 2015 Regulation A 
Release at Section II.B.5.
    \106\ For a concurrent offering under Rule 506(b), an issuer 
would need to conclude that purchasers in the Rule 506(b) offering 
were not solicited by means of a general solicitation under amended 
Rule 147. For example, the issuer may have had a preexisting 
substantive relationship with such purchasers. Otherwise, the 
solicitation conducted in connection with the Rule 147 offering may 
preclude reliance on Rule 506(b). See also SEC Rel. No. 33-8828 
(Aug. 3, 2007) [72 FR 45116 (Aug. 10, 2007)].
    \107\ See proposed Rule 147(f).
    \108\ See id.; see also discussion in Section II.B.1 above.
---------------------------------------------------------------------------

    Consistent with our approach to integration in Rule 251(c), we are 
proposing that offers or sales made in reliance on Rule 147 should not 
be integrated with subsequent offers or sales that are registered under 
the Securities Act, except as provided under our proposed paragraph (h) 
to Rule 147, or qualified by the Commission pursuant to Regulation A. 
While prior offers or sales of securities made in reliance on Rule 147 
are currently not integrated with subsequent Regulation A 
offerings,\109\ we believe that expressly adding subsequent offers or 
sales of securities made in reliance on Regulation A to the Rule 147 
integration safe harbor would provide issuers with clarity and 
additional certainty about their eligibility to conduct a Rule 147 
offering before commencing an offering pursuant to Regulation A. 
Additionally, we believe that issuers that seek to register offerings 
under the Securities Act should be encouraged to do so without the risk 
that prior offers or sales pursuant to Rule 147 could be integrated 
with such offerings. We are mindful, however, of the risk that offers 
made pursuant to Rule 147 shortly before a registration statement is 
filed could be viewed as conditioning the market for that registered 
offering. Accordingly, proposed Rule 147 would address this risk by 
excluding from the safe harbor any such offer made to persons other 
than qualified institutional buyers and institutional accredited 
investors within the 30-day period before a registration statement is 
filed with the Commission.\110\
---------------------------------------------------------------------------

    \109\ See Rule 251(c)(1) of Regulation A, 17 CFR 230.251(c)(1).
    \110\ In such circumstances, whether an offer made within the 
thirty-day period before the filing of a registration statement 
would constitute an impermissible offer for purpose of Securities 
Act Section 5(c) would be based on the facts and circumstances of 
such offer.
---------------------------------------------------------------------------

    Additionally, subsequent offers or sales pursuant to Securities Act 
Rule 701 or an employee benefit plan would be included in the proposed 
Rule 147(g) integration safe harbor. While these types of offerings to 
employees and to persons that provide similar functions for the issuer 
may provide the issuer with capital, they are primarily compensatory in 
nature and benefit the issuer and its employees in a manner that is 
distinct from other types of securities offerings, such as by aligning 
employee and company interests. For these reasons, we believe that 
these types of compensatory employee benefit offerings should be 
included in the safe harbor, if they occur subsequent to a Rule 147 
offering.
    We also propose to include subsequent offers or sales made pursuant 
to Regulation S \111\ in proposed Rule 147(g), as this exemption is 
only available for offers and sales of securities that are made outside 
the United States.\112\ Given their offshore character, we do not 
believe that offerings conducted pursuant to Regulation S should be 
integrated with previous Rule 147 intrastate offerings.
---------------------------------------------------------------------------

    \111\ 17 CFR 230.900 through 905.
    \112\ See Preliminary Note 6 of Regulation S.
---------------------------------------------------------------------------

    Additionally, we propose to include in the list of transactions 
covered by the Rule 147 safe harbor subsequent offers or sales of 
securities made pursuant to rules we are concurrently adopting today in 
a companion release for securities-based crowdfunding transactions 
under Title III of the JOBS Act.\113\ Given the unique capital 
formation method available to issuers and investors in the crowdfunding 
rules we are adopting and the small dollar amounts involved, we do not 
propose to integrate offers or sales of such securities issued in 
federal crowdfunding transactions that occur subsequent to the 
completion of any offering conducted pursuant to Rule 147.\114\
---------------------------------------------------------------------------

    \113\ See Regulation Crowdfunding Adopting Release.
    \114\ See id. An issuer contemplating a securities-based 
crowdfunding transaction pursuant to Section 4(a)(6) subsequent to 
any offers or sales conducted in reliance on Rule 147, as proposed 
to be amended, should look to the rules for securities-based 
crowdfunding transactions to ensure compliance with the advertising 
provisions of the exemption.
---------------------------------------------------------------------------

Request for Comment
    28. As proposed, should we include any prior offers or sales of 
securities made by the issuer before the start of a Rule 147 offering 
in the Rule 147(g) integration safe harbor? Why or why not?
    29. Should the Rule 147(g) integration safe harbor include, as 
proposed, the list of subsequent offers or sales of securities by the 
issuer that may be made within six months after the termination of the 
Rule 147 offering without being subject to integration? Why or why not?
    30. Should we expand the list of subsequent offers or sales of 
securities by the issuer that may be made within six months after the 
termination of the Rule 147 offering without being subject to 
integration to include other types of offers and sales of securities by 
the issuer? Alternatively, should we narrow the list of subsequent 
offers or sales of securities included in the integration safe harbor? 
Why or why not? Please explain.
    31. Should we include language in the rule text expressly stating 
that an offering made in reliance on Rule 147 would not be integrated 
with another exempt offering made concurrently by the issuer, provided 
that each offering complies with the requirements of the exemption that 
is being relied upon for the particular offering? Why or why not?
    32. Should we include a new paragraph (h) to Rule 147, as proposed, 
concerning offers to investors other than qualified institutional 
investors and institutional accredited investors within 30 calendar 
days prior to a registered offering? Why or why not?
e. Other Considerations
    Currently, Rule 147(f)(3) requires issuers, in connection with any 
offers or sales pursuant to the rule, to disclose, in writing, the 
limitations on resale contained in Rule 147(e) \115\ and the 
requirements for stop transfer instructions for the issuer's transfer 
agent set forth in Rule 147(f)(1)(i)-(ii).\116\ The same requirements 
apply in connection with the issuance of new certificates for any of 
the securities that are part of the same issue that are presented for 
transfer during the period specified in Rule 147(e). We believe that 
these disclosure requirements provide important protections to 
investors and issuers alike by helping to ensure that investors 
understand the limitations and restrictions associated with a purchase 
of securities pursuant to the rule.

[[Page 69797]]

Currently, however, the rule does not specifically identify to whom or 
when such disclosure should be provided.\117\ We propose to retain the 
substance of these requirements, in modified form, in the amended 
rules, while clarifying the application of the disclosure 
requirements.\118\
---------------------------------------------------------------------------

    \115\ 17 CFR 230.147(e). See also discussion in Section II.B.4.c 
above.
    \116\ 17 CFR 230.147(f)(1)(i)-(ii).
    \117\ See 17 CFR 230.147(f)(3).
    \118\ Proposed Rule 147(f)(1)(i) would retain the existing 
legend requirement for stock certificates but specify the exact 
language to be provided.
---------------------------------------------------------------------------

    Specifically, we propose to clarify in the text of the amended rule 
the specific language of the required disclosure and that such 
disclosure should be prominently provided to each offeree and purchaser 
at the time any offer or sale is made by the issuer to such person 
pursuant to the exemption.\119\ The rule, however, would no longer 
require that such disclosure be made in writing in all instances. We 
propose to amend the current requirement to provide issuers with 
flexibility by permitting them to provide the required disclosure to 
offerees in the same manner in which an offer is communicated,\120\ 
while continuing to require written disclosure to all purchasers. We 
believe that this approach would reduce the compliance obligations of 
issuers, particularly smaller companies likely to conduct offerings 
pursuant to the exemption, by no longer requiring disclosure to 
offerees in writing when offers are communicated orally. As the 
proposed requirement would apply to every offer of securities by the 
issuer pursuant to the exemption, including subsequent offers to the 
same offeree, and in light of the continuing requirement to provide 
written disclosure to all purchasers of the securities, we do not 
believe that the easing of the current requirement as it relates to 
oral offers would result in an increase in risks to investors.
---------------------------------------------------------------------------

    \119\ Currently, Rule 147(f)(3) requires issuers to disclose the 
required information ``in connection with'' any offers or sales of 
securities but does not specify the time at which such disclosure 
must be provided to offerees or purchasers. Proposed Rule 147(f)(3) 
would require issuers to provide the required disclosure to offerees 
and purchasers at the time of any offers or sales of securities, 
thereby eliminating the risk that an issuer could, for example, make 
an offer of securities at one point in time and provide the required 
disclosures at a later date. See proposed Rule 147(f)(3).
    \120\ This proposed approach would be consistent with the 
treatment of the ``testing the waters'' legend requirements in Rule 
255(b) of Regulation A. See 17 CFR 230.255(b).
---------------------------------------------------------------------------

    As noted above, we propose to retain the substance of the 
disclosure requirements of current Rule 147(f)(3), in modified form, in 
the amended rules. As proposed, Rule 147(f)(3) would require issuers to 
make specified disclosures to offerees and purchasers about the 
limitations on resale contained in proposed Rule 147(e) and the legend 
requirement of proposed Rule 147(f)(1)(i), but would no longer require 
issuers to disclose to offerees and purchasers the stop transfer 
instructions provided by an issuer to its transfer agent \121\ and the 
provisions of Rule 147(f)(2) regarding the issuance of new certificates 
during the Rule 147(e) resale period.\122\ Although issuers would have 
to continue to comply with these requirements,\123\ we believe that 
requiring issuers to disclose that information to offerees and 
purchasers does not add anything to the existing disclosures under 
Rules 147(e) and (f)(1), and we therefore propose to eliminate this 
disclosure requirement from the rule.\124\
---------------------------------------------------------------------------

    \121\ Rule 147(f)(1)(ii), 17 CFR 230.147(f)(1)(ii).
    \122\ Rule 147(f)(2), 17 CFR 230.147(f)(2). Additionally, as 
discussed in Section II.B.1 above, we propose to require issuers in 
offerings conducted pursuant to Rule 147 to disclose to each offeree 
in the manner in which any offer is communicated and to each 
purchaser of a security in writing that sales will be made only to 
residents of the same state or territory as the issuer. See proposed 
Rule 147(f)(3).
    \123\ See proposed Rule 147(f)(1)(ii) and proposed Rule 
147(f)(2).
    \124\ See proposed Rule 147(f)(3).
---------------------------------------------------------------------------

Request for Comment
    33. As proposed, should we modify the requirements of current Rule 
147(f)(3) to require issuers to disclose to offerees and purchasers the 
resale limitations of Rule 147(e) and the legend requirement of Rule 
147(f)(1)(i) at the time any such offer or sale is made, but no longer 
require an issuer to disclose to such persons the stop transfer 
instructions to its transfer agent, if any, and the provisions of Rule 
147(f)(2) regarding the issuance of new certificates during the Rule 
147(e) resale period? \125\ Or should we preserve the existing rule 
requirements? Why or why not?
---------------------------------------------------------------------------

    \125\ See also Request for Comment 3 above regarding proposed 
Rule 147(f)(3) and the requirement that issuers disclose to offerees 
and purchasers that sales will be made only to residents of the same 
state or territory as the issuer.
---------------------------------------------------------------------------

    34. As proposed, should we permit the disclosures required by Rule 
147(f)(3) to be provided orally? Should we instead require these 
disclosures to be made in writing, as under the current rule? 
Alternatively, should we no longer require these disclosures to be 
provided to offerees, while continuing to require that they be provided 
to purchasers? Or, prior to making any sales, should we require issuers 
that only make oral offers to provide, in addition to the required oral 
disclosure, written disclosure to offerees a reasonable time before any 
sales are made to such persons? Why or why not?
    35. Should the amendments to Rule 147 include a substantial 
compliance provision, similar to the provision in Rule 508 of 
Regulation D,\126\ or otherwise account for insignificant deviations in 
a manner that is similar to Rule 260 of Regulation A? \127\ In light of 
the proposal to permit issuers to sell securities pursuant to Rule 147 
on the basis of a reasonable belief as to a purchaser's residency 
status, what additional situations, if any, could a substantial 
compliance or insignificant deviation rule address? Please explain.
---------------------------------------------------------------------------

    \126\ 17 CFR 230.508.
    \127\ 17 CFR 230.260.
---------------------------------------------------------------------------

    36. Should we amend Rule 147 to make the exemption available for 
secondary distributions? Why or why not?
f. State Law Requirements
    We believe the proposed amendments to Rule 147 would facilitate 
capital formation by smaller companies seeking to raise capital in-
state by increasing the utility of the rule while maintaining 
appropriate protections for resident investors. Consistent with the 
policy underlying the adoption of objective standards for determining 
compliance with Section 3(a)(11) in current Rule 147, we believe that 
the protections afforded to resident investors in an intrastate 
offering primarily flow from the requirements of state securities 
law.\128\ For example, as with the federal securities laws, states 
generally require an issuer to register an offering with appropriate 
state authorities when offers or sales of securities are made to their 
residents, unless the state has adopted, by rule or statute, an 
exemption from registration.
---------------------------------------------------------------------------

    \128\ See note 14 above.
---------------------------------------------------------------------------

    As discussed above,\129\ in recent years a number of states have 
adopted and/or enacted provisions in their rules or statutes that 
generally require an issuer, in addition to complying with various 
state-specific requirements to qualify for an exemption from 
registration,\130\ to comply with Section 3(a)(11) and Rule 147.\131\ 
Of the states that have adopted and/or enacted provisions that require 
an issuer to comply with Rule 147, either alone or in conjunction with 
Section 3(a)(11), no state has adopted and/or enacted a provision with 
an aggregate offering amount that exceeds $4 million.\132\ 
Additionally, almost all

[[Page 69798]]

of these states have adopted provisions that impose investment 
limitations on investors.
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    \129\ See Section II.A above.
    \130\ See note 24 above.
    \131\ See note 25 above.
    \132\ See http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-resource-center/intrastate-crowdfunding-directory/. Illinois is the only state with a 
crowdfunding provision allowing for a maximum aggregate offering 
amount up to $4 million in a twelve-month period. All other states 
that have adopted some form of a state-based crowdfunding provision 
limit the aggregate offering amount to between $1 million and $2.5 
million. See Illinois House Bill 3429, Sec.  4.T. (2015), available 
at: https://legiscan.com/IL/text/HB3429/id/1257029.
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    Rule 147 does not currently have an offering amount limitation and 
does not currently limit the amount of securities an investor can 
purchase in an offering pursuant to the rule. Preliminarily, however, 
we believe that, in light of the proposed changes to Rule 147, which, 
as noted above, would no longer be a safe harbor for compliance with 
Section 3(a)(11), a maximum offering amount limitation and investor 
investment limitations in the rule would provide investors with 
additional protection and would be consistent with existing state law 
crowdfunding provisions.\133\ As such, we are proposing to limit the 
availability of Rule 147, as proposed to be amended,\134\ to issuers 
that have registered an offering in the state in which all of the 
purchasers are resident or that conduct the offering pursuant to an 
exemption from state law registration in such state that limits the 
amount of securities an issuer may sell pursuant to such exemption to 
no more than $5 million in a twelve-month period and that limits the 
amount of securities an investor can purchase in any such 
offering.\135\ We are particularly interested in getting feedback from 
the states and market participants, however, and are seeking comment on 
this issue, including whether additional or alternative requirements 
should be imposed on offerings conducted pursuant to the proposed rule 
at the federal level.
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    \133\ States may have non-crowdfunding exemptions for larger 
offerings and issuers seeking to rely on any such state exemption 
could continue to conduct the offering pursuant to Section 3(a)(11) 
or find an alternate federal exemption. See, e.g., Section 202(14) 
of the Uniform Securities Act of 2002 (exempting transactions to not 
more than 25 purchasers, other than institutional investors and 
federal covered investment advisers, that do not utilize a general 
solicitation or general advertising).
    \134\ See discussions in Section II.B.1 through II.B.2.e above 
for additional limitations and requirements that would apply to 
offerings conducted pursuant to proposed Rule 147.
    \135\ See proposed Rule 147(a).
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    State crowdfunding laws allow, and in some states mandate, the use 
of an intermediary. The intermediary may be a federally registered 
broker-dealer, or an intrastate broker-dealer that is exempt from 
federal registration requirements. Section 15(a)(1) of the Exchange Act 
provides an exemption for a broker-dealer whose business is 
``exclusively intrastate and who does not make use of any facility of a 
national securities exchange.'' In the state crowdfunding context, some 
intermediaries may be small broker-dealers seeking to only operate 
intrastate. To the extent that information posted on the Internet in 
connection with a state crowdfunding offering by an intermediary would 
be considered an interstate offer of securities, such business would be 
ineligible for the intrastate broker-dealer exemption. We are seeking 
comment on these issues, including whether the proposed rule should 
require issuers to use the services of any such intermediary at the 
federal level.
Request for Comment
    37. Should we limit the availability of Rule 147, as proposed to be 
amended, to issuers that have registered an offering in the state in 
which all of the purchasers are resident or that conduct the offering 
pursuant to an exemption from state law registration in such state that 
limits the amount of securities an issuer may sell pursuant to such 
exemption to no more than $5 million in a twelve-month period and the 
amount of securities an investor can purchase in any such offering? Why 
or why not?
    38. Would the proposed requirements that an issuer conduct the 
offering pursuant to an exemption from state law registration in such 
state that limits the amount of securities an issuer may sell pursuant 
to such exemption to no more than $5 million in a twelvemonth period 
and that limits the amount of securities an investor can purchase in 
any such offering provide adequate investor protections at the federal 
level? Why or why not? Or, are the proposed maximum offering amount 
and/or investor investment limitations unnecessary at the federal 
level, in light of the local character of the intrastate offerings that 
would be conducted pursuant to the proposed rule and the presence of 
state oversight in such offerings? Please explain.
    39. Should Rule 147, as proposed to be amended, specify the maximum 
offering amount limitation that must be included in a state exemption 
from registration? Why or why not? Should the proposed $5 million 
maximum offering amount limitation be adopted at a lower or higher 
dollar amount? If so, what amount and why? If not, why not?
    40. Should Rule 147, as proposed to be amended, itself specify a 
maximum offering amount limitation for purposes of compliance with the 
proposed rule at the federal level and, in a change from the proposed 
rule, no longer require that a maximum offering amount limitation be 
included in any exemptive provision adopted at the state level? What 
benefit, if any, is derived from the proposed inclusion of a specified 
maximum offering amount limitation of not more than $5 million of 
securities in a twelve-month period at both the state and federal 
level? Please explain.
    41. Should the proposed requirement that a state law exemption from 
registration impose investment limitations on investors, when the 
offering is conducted pursuant to proposed Rule 147 at the federal 
level, include specific maximum dollar amounts that an investor must be 
subject to or other specific criteria, such as criteria based on an 
investor's net worth and/or annual income? Why or why not? Please 
explain.
    42. Should Rule 147, as proposed to be amended, include the 
proposed requirement that a state law exemption include investment 
limitations in order for the issuer to be able to conduct an intrastate 
offering pursuant to Rule 147, as proposed to be amended? Why or why 
not? Please explain.
    43. Should we limit the application of the proposed requirement 
that a state law exemption include investment limitations, in order for 
the issuer to be able to conduct an intrastate offering pursuant to 
Rule 147, as proposed to be amended, to non-accredited investors only, 
while not requiring an accredited investor, as that term is defined in 
Rule 501(a) of Regulation D,\136\ to be subject to an investment 
limitation? Why or why not?
---------------------------------------------------------------------------

    \136\ See 17 CFR 230.501(a).
---------------------------------------------------------------------------

    44. Should the provisions at the federal level allow states to have 
greater flexibility in drafting exemptive provisions that in their 
judgment provide sufficient investor protections at the state level, 
whether or not such state law provisions include a maximum offering 
amount limitation or investor investment limitations? Why or why not?
    45. As an additional or alternative requirement to the current 
requirements in proposed Rule 147, should we limit the availability of 
the exemption to issuers that have registered an offering in the state 
in which all of the purchasers are resident or that conduct the 
offering pursuant to an exemption from state law registration in such 
state that requires the use of an intermediary? Why or why not?
    46. Should we provide guidance about the operation of the 
intrastate broker-dealer exemption under the

[[Page 69799]]

Exchange Act, including with respect to the use of the Internet in 
connection with offers and sales of securities? Why or why not? Should 
we permit intrastate broker-dealers to use the Internet to make 
interstate offers so long as all sales are limited to intrastate 
purchasers? Why or why not?
    47. Should we adopt any minimum disclosure or delivery requirements 
for offerings that are conducted pursuant to the proposed rule that are 
offered pursuant to an exemption from state registration, such as 
narrative and/or financial statement disclosure and delivery 
requirements similar to the requirements of Rule 502(b) of Regulation 
D? \137\ Should any potential disclosure or delivery requirements be 
limited to sales only to non-accredited investors? Why or why not?
---------------------------------------------------------------------------

    \137\ 17 CFR 230.502(b).
---------------------------------------------------------------------------

    48. Whether we adopt the proposed revisions to Rule 147 as amended 
Rule 147 or as a new rule, should we require a notice filing with the 
exemption? For example, if we repeal Rule 505 and adopt the exemption 
as new Rule 505, should we require issuers that conduct offerings 
pursuant to the new exemption to file offering related information with 
the Commission on a Form D? Why or why not? Should we instead adopt a 
new form to file offering related information that is similar to the 
information disclosed on Form D? If so, what information should that 
new form elicit?

C. Preservation of Section 3(a)(11) Statutory Intrastate Offering 
Exemption

    The proposed amendments, if adopted, would not alter the fact that 
the Section 3(a)(11) statutory exemption continues to be a capital 
raising alternative for issuers with local operations seeking local 
financing. We believe, however, that it is possible that issuers will 
find it easier to satisfy the requirements of proposed Rule 147 than 
Section 3(a)(11).
    The proposed amendments to Rule 147 would operate prospectively 
only. If adopted as proposed, Rule 147 would no longer be a safe harbor 
for conducting a valid intrastate exempt offering under Section 
3(a)(11). An issuer that attempts to comply with amended Rule 147, but 
fails to do so, may claim any other exemption that is available. 
Failure to satisfy the requirements of amended Rule 147, however, would 
also likely result in a failure to satisfy the statutory requirements 
for the intrastate offering exemption under Section 3(a)(11) since the 
requirements of Section 3(a)(11) are more restrictive.
    We recognize that none of the existing state crowdfunding 
provisions contemplate reliance upon the proposed amendments to Rule 
147 and that states that have crowdfunding provisions based on 
compliance with Section 3(a)(11), or compliance with both Section 
3(a)(11) and Rule 147, would need to amend these provisions in order 
for issuers to take full advantage of these amendments.\138\ States 
that have adopted crowdfunding provisions based on current Rule 147 may 
need to consider the import of any final rule amendments at the federal 
level. We are seeking comment on how the amendments to Rule 147 would 
impact these provisions and whether it would be better if the proposed 
amendments to Rule 147 were adopted as a new exemption from 
registration, rather than as amendments to current Rule 147.
---------------------------------------------------------------------------

    \138\ See note 25 and related discussion in Section II.A above.
---------------------------------------------------------------------------

Request for Comment
    49. Should we leave existing Rule 147 in place and unchanged as a 
safe harbor for compliance with Section 3(a)(11) while adopting the 
proposed revisions to Rule 147 as a new rule instead? For example, if 
we were to repeal Rule 505 of Regulation D,\139\ should the Commission 
adopt the proposed revisions to Rule 147 as new Rule 505 of Regulation 
D? If so, are there any additional changes to the proposed rule that 
should be made if it were to be adopted instead as a new rule? If so, 
please explain what changes are needed and why.
---------------------------------------------------------------------------

    \139\ 17 CFR 230.505. See discussion in Section III.C below.
---------------------------------------------------------------------------

    50. States that have adopted crowdfunding provisions based on 
current Rule 147 may need to consider the import of any final rule 
amendments at the federal level. How would the proposed amendments to 
Rule 147 impact these provisions? Would the Commission's rulemaking 
process, which in this case provides for a 60-day comment period, and 
the additional time before any final rules potentially would be adopted 
and thereafter become effective, provide sufficient time for states to 
consider and address the impact of the proposed amendments on their 
state law provisions? Why or why not? Please explain.

III. Proposed Amendments to Rules 504 and 505 of Regulation D

A. Overview of Rules 504 and 505

    Rule 504 \140\ of Regulation D provides issuers with an exemption 
from registration for offers and sales of up to $1 million of 
securities in a twelve-month period, provided that the issuer is not:
---------------------------------------------------------------------------

    \140\ 17 CFR 230.504.
---------------------------------------------------------------------------

     Subject to reporting pursuant to Section 13 or 15(d) of 
the Exchange Act; \141\
---------------------------------------------------------------------------

    \141\ 17 CFR 230.504(a)(1).
---------------------------------------------------------------------------

     an investment company; \142\ or
---------------------------------------------------------------------------

    \142\ 17 CFR 230.504(a)(2). Investment companies are companies 
that are registered or required to be registered under the 
Investment Company Act of 1940. 15 U.S.C. 80a-1 et seq.
---------------------------------------------------------------------------

     a development stage company that either has no specific 
business plan or purpose or that has indicated that its business plan 
is to engage in a merger or acquisition with an unidentified company or 
companies (``blank check company'').\143\
---------------------------------------------------------------------------

    \143\ 17 CFR 230.504(a)(3).

Additionally, Rule 504 imposes certain conditions, including 
limitations on the use of general solicitation or general advertising 
in the offering and the restricted status of securities issued pursuant 
to the exemption, with limited exceptions in this regard for offers and 
---------------------------------------------------------------------------
sales made:

     Exclusively in one or more states that provide for the 
registration of the securities, and require the public filing and 
delivery to investors of a substantive disclosure document before sale 
that are made in accordance with state law requirements;
     in one or more states that have no provision for the 
registration of the securities or the public filing or delivery of a 
disclosure document before sale, if the securities have been registered 
in at least one state that provides for such registration, public 
filing and delivery before sale, offers and sales are made in that 
state in accordance with such provisions, and the disclosure document 
is delivered before sale to all purchasers (including those in the 
states that have no such procedure); or
     exclusively according to state law exemptions from 
registration that permit general solicitation and general advertising 
so long as sales are made only to ``accredited investors'' as defined 
in Rule 501(a) of Regulation D.\144\
---------------------------------------------------------------------------

    \144\ 17 CFR 230.504(b)(1).
---------------------------------------------------------------------------

    Rule 504, together with Rules 505 and 506, comprise the Securities 
Act exemptions of Regulation D.\145\ Adopted

[[Page 69800]]

by the Commission in 1982,\146\ Regulation D replaced three previously 
existing exemptions with a cohesive set of rules designed to:
---------------------------------------------------------------------------

    \145\ 17 CFR 230.500 through 508. Rules 501 through 503 contain 
definitions, conditions, and other provisions that apply generally 
throughout Regulation D. Rules 504, 505 and 506(c) are exemptions 
from registration under the Securities Act, while Rule 506(b) is a 
``safe harbor'' for compliance for the non-public offering exemption 
in Section 4(a)(2) of the Securities Act. Rule 507 disqualifies 
issuers from relying on Regulation D, under certain circumstances, 
for failure to file a Form D notice. Rule 508 provides a safe harbor 
for certain insignificant deviations from a term, condition, or 
requirement of Regulation D.
    \146\ See SEC Rel. No. 33-6389 (Mar. 8, 1982) [47 FR 11251 (Mar. 
16, 1982)].
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     Simplify existing rules and regulations;
     eliminate any unnecessary restrictions that those rules 
and regulations placed on issuers, particularly small businesses; and
     achieve uniformity between state and federal exemptions in 
order to facilitate capital formation consistent with the protection of 
investors.\147\
---------------------------------------------------------------------------

    \147\ Id. at 2.
---------------------------------------------------------------------------

    Regulation D offerings are exempt from the registration 
requirements of the Securities Act. Offerings conducted pursuant to 
Rule 504 or Rule 505, however, must be registered in each state in 
which they are offered or sold unless an exemption to state 
registration is available under state securities laws.\148\ The vast 
majority of states require registration of Rule 504 offerings.\149\ One 
state, however, recently adopted a form of state-based crowdfunding 
that permits the use of general solicitation, but still exempts the 
issuances of securities from state registration where, in addition to 
following various state-specific requirements to qualify for the 
exemption, an issuer also complies with Rule 504 of Regulation D.\150\ 
Additionally, offerings conducted pursuant to Rules 505 and 506 are 
subject to bad actor disqualification provisions, while offerings 
conducted pursuant to Rule 504 are not subject to such provisions.\151\
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    \148\ Section 18(b)(4)(D) of the Securities Act provides 
``covered security'' status to all securities sold in transactions 
exempt under Commission rules promulgated under Section 4(a)(2), 
which includes Rule 506 of Regulation D. Covered security status 
under Section 18 provides for the preemption of state securities 
laws registration and qualification requirements for offerings of 
such securities. In comparison, securities issued pursuant to either 
Rules 504 or 505 are not covered securities as these two exemptions 
are adopted pursuant to the Commission's authority under Section 
3(b)(1) of the Securities Act.
    \149\ New York and the District of Columbia do not require 
registration of Rule 504 offerings. See SEC Rel. No. 33-7644, 2 n.12 
(Feb. 25, 1999) [64 FR 11090 (Mar. 8, 1999)] (``Seed Capital 
Release'').
    \150\ Of the 29 states and the District of Columbia that have 
adopted intrastate crowdfunding provisions, only Maine allows an 
issuer to rely upon Rule 504 of Regulation D. See Me. Rev. Stat. 
tit. 32, Sec.  16304(6-A)(D) (2013).
    \151\ See Rule 505(b)(2)(iii), 17 CFR 230.505(b)(2)(iii), and 
Rule 506(d), 17 CFR 230.506(d), of Regulation D.
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B. Proposed Amendments to Rules 504 and 505

    We propose to increase the aggregate amount of securities that may 
be offered and sold in any twelve-month period pursuant to Rule 504 
from $1 million to $5 million and to disqualify certain bad actors from 
participation in Rule 504 offerings. We believe these amendments to 
Rule 504 will facilitate capital formation, result in increased 
efficiencies (and potentially lower costs) to issuers and increase 
investor protection. We also understand that state securities 
regulators have sought to expedite the state securities law 
registration process by developing coordinated review programs.\152\ We 
believe these amendments could give state securities regulators greater 
flexibility to develop regional coordinated review programs that would 
rely on Rule 504 at the federal level by increasing the maximum amount 
of capital that can be raised by issuers under such programs and by 
providing states with assurance that certain bad actors would be 
excluded from the exemptive regime at the federal level. We further 
propose a technical amendment to Rules 504 and 505 to account for the 
re-designation of Securities Act Section 3(b) as Section 3(b)(1) that 
occurred as a result of the enactment of the JOBS Act in 2012.\153\ 
Additionally, in order to account for the proposed increase in the Rule 
504 aggregate offering amount limitation, we propose technical 
amendments to the notes to Rule 504(b)(2) that would update the current 
illustrations in the rule regarding how the aggregate offering 
limitation is calculated in the event that an issuer sells securities 
pursuant to Rule 504 and Rule 505 within the same twelve-month 
period.\154\ We also are seeking comment on whether any additional 
changes to Rule 504 should be made at this time that would further 
increase issuer capital formation options without any increase in risks 
to investors.
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    \152\ For example, in order to address the potential 
inefficiencies associated with state law review and qualification of 
Regulation A offering statements, as highlighted by the GAO Report 
to Congress required under Title IV of the JOBS Act, state 
securities regulators and NASAA implemented a streamlined 
coordinated review program for Regulation A offerings that was 
designed to address many of the perceived concerns of market 
participants. See Factors that May Affect Trends in Regulation A 
Offerings, GAO-12-839 (July 2012) available at: http://www.gao.gov/assets/600/592113.pdf (``GAO Report''). See also note 11 above for a 
brief description of state coordinated review programs.
    \153\ Pub. L. 112-106, 126 Stat. 306.
    \154\ See Notes 1 and 2 to Rule 504(b)(2). [17 CFR 
230.504(b)(2)].
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    In light of the proposed changes to Rule 504, we also seek comment 
on the continued utility of Rule 505 as an exemption from registration. 
Rule 505 is used far less frequently than Rule 506, and an increase in 
the Rule 504 offering ceiling from $1 million to $5 million could 
diminish its utility.
    The proposed amendments to Rule 504 would raise the aggregate 
amount of securities an issuer may offer and sell in any twelve-month 
period from $1 million to $5 million, which is the maximum statutorily 
allowed under Section 3(b)(1).\155\ The Commission has not raised the 
12-month aggregate offering limit in Rule 504 since 1988, when the 
Commission increased the original Rule 504 offering limit of $500,000 
to $1 million.\156\ We believe that raising the aggregate offering 
limitation to the maximum statutorily allowed under Section 3(b)(1) 
would facilitate issuers' ability to raise capital. The proposed 
offering limitation would increase the flexibility of state securities 
regulators to set their own state offering limitations and to consider 
whether any additional requirements should be implemented at the state 
level. In addition, it would facilitate state efforts to increase the 
efficiencies associated with the registration of securities offerings 
in multiple jurisdictions through regional coordinated review programs.
---------------------------------------------------------------------------

    \155\ Rules 504 and 505 were adopted pursuant to the 
Commission's small issues exemptive authority under Section 3(b)(1) 
of the Securities Act, which gives the Commission authority to adopt 
an exemption for offerings not exceeding $5 million where the 
Commission believes registration under the Securities Act is not 
necessary by reason of the small amount involved or the limited 
character of the public offering.
    \156\ See SEC Rel. No. 33-6758 (Mar. 3, 1988) [53 FR 7870 (Mar. 
10, 1988)]. See also discussion in Section V below.
---------------------------------------------------------------------------

    Much like the deference that Congress provided to the states in the 
intrastate offering exemption under Section 3(a)(11), in adopting Rule 
504, the Commission placed substantial reliance upon state securities 
laws and regulations.\157\ As the Commission has stated previously, we 
believe that the size and local nature of the smaller offerings that 
are typically conducted by smaller issuers pursuant to Rule 504 does 
not warrant imposing extensive regulation at the federal level.\158\
---------------------------------------------------------------------------

    \157\ Seed Capital Release at 1; see also SEC Rel. No. 33-6389 
(Mar. 8, 1982) [47 FR 11251 (Mar. 16, 1982)].
    \158\ Seed Capital Release, at 2.
---------------------------------------------------------------------------

    The purpose of Rule 504 is to aid small businesses raising ``seed 
capital.'' \159\ Rule 504 permits eligible

[[Page 69801]]

issuers \160\ to offer and sell securities to an unlimited number of 
persons without regard to their sophistication, wealth or experience 
and, in certain circumstances, without delivery of any specified 
information.\161\ These offerings are, however, subject to federal 
antifraud provisions and civil liability provisions. \162\ Securities 
issued under the exemption are restricted,\163\ and the offering is 
subject to the prohibition against general solicitation and general 
advertising,\164\ unless the rule's specified conditions permitting the 
issuance of freely tradable securities and a public offering are 
met.\165\
---------------------------------------------------------------------------

    \159\ Id. ``Seed capital'' refers to the initial investments 
that are typically made in newly formed startup companies in order 
to assist such companies with the beginning of their operations. 
These investments are usually relatively small in total dollar 
amounts.
    \160\ See note 143 and related text in the discussion above.
    \161\ Rule 504 permits sales to an unlimited number of 
accredited and non-accredited investors. See note 105 and related 
text in the discussion above.
    \162\ Seed Capital Release, at 2. 15 U.S.C. 77l(a)(2).
    \163\ See Rule 504(b)(1) [17 CFR 230.504(b)(1)]; Rule 
144(a)(3)(ii) [17 CFR 230.144(a)(3)(ii)].
    \164\ See Rule 504(b)(1) [17 CFR 230.504(b)(1)]; Rule 502(c) [17 
CFR 230.502(c)].
    \165\ See note 144 and related text in the discussion above.
---------------------------------------------------------------------------

    Similar to the rationale underlying our proposal to ease the 
eligibility requirements for issuers under Rule 147, increasing the 
Rule 504 offering limit to $5 million would create a larger federal 
exemptive framework for state regulators to tailor and coordinate among 
themselves state specific requirements for smaller offerings by smaller 
issuers that are consistent with their respective sovereign interests 
in facilitating capital formation and the protection of investors in 
intrastate and regional interstate securities offerings. Increasing the 
offering limit from $1 million to $5 million may also make the Rule 504 
exemption more attractive to start-up companies seeking capital 
financing, as compared to alternative financing methods, as the legal 
and accounting expenses of the offering may be offset by the larger 
gross proceeds of the offering to the issuer.
    In conjunction with our proposed increase to the Rule 504 aggregate 
offering amount limitation, we are proposing to adopt provisions that 
would disqualify certain bad actors from participation in offerings 
conducted pursuant to the exemption.\166\ We believe that the proposed 
disqualification provisions, which are substantially similar to related 
provisions in Rule 506 of Regulation D,\167\ would create a more 
consistent regulatory regime across Regulation D that would benefit 
investors in Rule 504 offerings with increased protections. We also 
believe that our proposed rule amendments may bolster efforts among the 
states to enter into, or revise existing, regional coordinated review 
programs that are designed to increase efficiencies associated with the 
registration of securities offerings in multiple jurisdictions without 
increasing risks to investors.
---------------------------------------------------------------------------

    \166\ See proposed Rule 504(b)(3).
    \167\ See 17 CFR 230.506(d). See also Rule 262 of Regulation A, 
17 CFR 230.262, and Rule 505(b)(2)(iii) of Regulation D, 17 CFR 
230,505(b)(2)(iii).
---------------------------------------------------------------------------

    The proposed Rule 504 disqualification provisions would be 
implemented by reference to the disqualification provisions of Rule 506 
of Regulation D.\168\ We believe that creating a uniform set of bad 
actor triggering events across the various exemptions from Securities 
Act registration should simplify due diligence, particularly for 
issuers that may engage in different types of exempt offerings. As 
proposed, the bad actor triggering events for Rule 504 would be 
substantially similar to existing provisions in Regulation D,\169\ 
Regulation A,\170\ and those adopted today in Regulation Crowdfunding 
\171\ and would apply to the issuer and other covered persons (such as 
underwriters, placement agents, and the directors, officers and 
significant shareholders of the issuer). Consistent with the 
Commission's treatment of disqualification in Rule 506(e), we propose 
that disqualification would only occur for triggering events that occur 
after effectiveness of any rule amendments,\172\ but disclosure would 
be required for triggering events that pre-date effectiveness of any 
rule amendments.\173\
---------------------------------------------------------------------------

    \168\ See proposed Rule 504(b)(3), referencing the 
disqualification provisions of Rule 506(d), 17 CFR 230.506(d), and 
note to proposed Rule 504(b)(3), referencing the disclosure 
provisions of Rule 506(e), 17 CFR 230.506(e).
    \169\ See Rules 505(b)(2)(iii) and 506(d) of Regulation D, 17 
CFR 230,505(b)(2)(iii), 230.506(d).
    \170\ See Rule 262 of Regulation A, 17 CFR 230.262.
    \171\ See Rule 503 of Regulation Crowdfunding.
    \172\ See proposed Rule 504(b)(3).
    \173\ See id.
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    Issuers have overwhelmingly relied upon Rule 506 instead of Rule 
504 for offerings of $1 million or less.\174\ As discussed more fully 
in Section V below, data suggests that this may be due to the 
preemption of state registration requirements, which is available to 
Rule 506 offerings, but not Rule 504 or 505 offerings.\175\ State 
regulators seeking to modernize and coordinate their regulatory regimes 
to facilitate early-stage capital financings may benefit from the 
proposed changes to Rule 504.
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    \174\ For the period 2009 through 2014, 34,705 Form D filings 
were made for offerings of less than $1 million, of which 3,719 
reported an offering made in reliance upon Rule 504. This 
represented 11% of all Regulation D offerings raising less than $1 
million. During this time period, 30,461 Form D filings reported an 
offering made in reliance upon Rule 506, representing 88% of all 
Regulation D offerings raising less than $1 million. Only 525 Form D 
filings reported reliance upon Rule 505, representing only 2% of all 
Regulation D offerings during this time period raising less than $1 
million. See Scott Bauguess, Rachita Gullapalli and Vladimir Ivanov, 
``Capital Raising in the U.S.: An Analysis of the Market for 
Unregistered Securities Offerings, 2009-2014'' (October 2015) 
(``Unregistered Offerings White Paper''), available at http://www.sec.gov/dera/staff-papers/white-papers/unregistered-offering10-2015.pdf.
    \175\ Id. The data on Regulation D offerings for the period from 
2009 through 2014, suggests that the preemption of state securities 
laws registration and qualification requirements, which is unique to 
Rule 506 offerings in Regulation D, may be of greater value to 
issuers than the unique features of either Rules 504 or 505. Data 
suggests that Rule 506 is the dominant offering method even among 
those offerings eligible for Rules 504 or 505. Almost 50% of all 
Rule 506 offerings by non[hyphen]funds issuers since 2009 were for 
$1 million or less and therefore may have qualified for the Rule 504 
exemption based on offering size. An additional 20% of offerings 
were for between $1 million and $5 million and therefore could have 
claimed a Rule 505 exemption based on offering size.
---------------------------------------------------------------------------

    We also are seeking public comment on whether additional changes to 
Rule 504 should be adopted in the final amended rules. In particular, 
in conjunction with the proposed increase in the Rule 504 offering 
amount limitation, we are contemplating amending the calculation of the 
aggregate offering limitation in Rule 504(b)(2).\176\ Currently, this 
rule requires issuers to aggregate all securities sold within the 
preceding 12 months in any transaction that is exempt under Section 
3(b) or in violation of Section 5(a) of the Securities Act for purposes 
of computing the aggregate offering price under Rule 504.\177\ This 
rule also includes illustrations of how the aggregate offering 
limitation is calculated in the event that an issuer sells securities 
pursuant to Rule 504 and Rule 505 within the same twelve-month 
period.\178\
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    \176\ We seek comment below on whether, if Rule 505 is retained 
in the final rules, a corresponding change should be made to Rule 
505(b)(2), 17 CFR 230.505(b)(2). See Request for Comment 63 below.
    \177\ 17 CFR 230.504(b)(2); see also 17 CFR 230.505(b)(2).
    \178\ See Notes 1 and 2 to Rule 504(b)(2). [17 CFR 
230.504(b)(2)].
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    When the current aggregation provisions in Rules 504 and 505 were 
originally adopted in Rule 505's predecessor Rule 242, the Commission 
noted that aggregating offering amounts across offerings conducted 
pursuant to Section 3(b) was intended to ``limit[] the potential for 
the issuer to raise large sums by circumventing the registration 
provisions of the Securities Act through

[[Page 69802]]

multiple offerings pursuant to Section 3(b).'' \179\ In the intervening 
years, however, in implementing Congressional mandates,\180\ the 
Commission has increased the potential for issuers, particularly 
smaller issuers, to raise large sums of capital in offerings that are 
exempt from registration in a more cost-effective manner, while 
continuing to provide appropriate safeguards for investors.\181\ 
Therefore, we are seeking comment on whether the current requirements 
for Rule 504(b)(2), as they relate to the aggregation of offering 
proceeds across all offerings that are conducted pursuant to Securities 
Act Section 3(b), should be retained in the amended rules.
---------------------------------------------------------------------------

    \179\ SEC Rel. No. 33-6180 (Jan. 17, 1980). This provision was 
subsequently carried over into Rule 505 and adopted into Rule 504 
when Regulation D was adopted by the Commission in 1982. See SEC 
Rel. No. 33-6389 (March 8, 1982); SEC Rel. No. 33-6339 (Aug. 7, 
1981).
    \180\ See JOBS Act, Pub. L. 112-106, 126 Stat. 306.
    \181\ See, e.g., Regulation A, 17 CFR 230.251 et seq., providing 
non-Exchange Act reporting companies with the option to raise up to 
$20 million annually pursuant to the requirements of Tier 1 and up 
to $50 million annually pursuant to the requirements of Tier 2.
---------------------------------------------------------------------------

    The Commission has brought a number of enforcement actions in 
recent years against persons that have sought to use the provision in 
Rule 504(b)(1)(iii) permitting conditional use of general solicitation 
and general advertising to engage in fraudulent offerings.\182\ In 
light of the foregoing, we also are seeking comment on whether we 
should adopt additional changes to Rule 504 that could potentially 
increase investor protections in such offerings. In particular, we are 
considering, and seeking comment on, whether limitations on resale 
should be imposed on securities sold in reliance on Rule 504(b)(1)(iii) 
or whether Rule 504(b)(1)(iii) should be repealed.\183\
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    \182\ See, e.g., SEC v. Stephen Czarnik, Case No. 10-cv-745 
(S.D.N.Y.), Litigation Release No. 21401 (Feb. 2, 2010); SEC v. 
Yossef Kahlon, a/k/a Jossef Kahlon and TJ Management Group, LLC, 
Case No. 4:12-cv-517 (E. D. Tex.) (Aug. 14, 2012).
    \183\ Any such amendment would not affect the resale status of 
securities sold under the exemptions in Rules 504(b)(1)(i) and 
504(b)(1)(ii), which exempt certain offerings of securities that are 
registered under a state securities law that requires the public 
filing and delivery of a disclosure document to investors before 
sale. As such, the resale limitations of Rule 502(d) would continue 
not to apply to securities sold in transactions that are exempted by 
those rules and those securities would not be ``restricted 
securities'' for purposes of Rule 144.
---------------------------------------------------------------------------

    Lastly, we propose certain technical amendments to Rules 504 and 
505. We propose a technical amendment to Rule 504(b)(2), and its 
related provision in Rule 505(b)(2), that would update the reference to 
Securities Act Section 3(b) to Section 3(b)(1). This technical revision 
is necessary in light of the re-designation of Section 3(b) as Section 
3(b)(1) that occurred as a result of the Securities Act amendments in 
Title IV of the JOBS Act.\184\ Additionally, we propose technical 
amendments to the notes to Rule 504(b)(2) that would update the current 
illustrations of how the aggregate offering amount limitation is 
calculated in the event that an issuer sells securities pursuant to 
Rule 504 and Rule 505 within the same twelve-month period.\185\ This 
technical revision is necessary in order to account for the proposed 
increase to the Rule 504 aggregate offering amount limitation.
---------------------------------------------------------------------------

    \184\ Pub. L. 112-106, 126 Stat. 306, at Sec. 401.
    \185\ See Notes 1 and 2 to proposed Rule 504(b)(2).
---------------------------------------------------------------------------

Request for Comment
    As proposed, should we increase the Rule 504 offering limit from a 
maximum of $1 million of securities in a twelve-month period to a 
maximum of $5 million of securities in a twelve-month period? Why or 
why not? Should we adopt a higher or lower aggregate offering limit? If 
so, what should the aggregate offering limit be and why? For example, 
should we use our general exemptive authority to adopt a $20 million 
annual offering limit in Rule 504 that aligns with the maximum offering 
limit permitted under Tier 1 of Regulation A? 52.
    52. Would the proposed increase in the Rule 504 aggregate offering 
amount limitation give state securities regulators greater flexibility 
to develop regional coordinated review programs that would rely on Rule 
504 at the federal level? Why or why not? What additional changes, if 
any, could we make to Rule 504 in order to facilitate efforts by state 
securities regulators to develop robust coordinated review programs 
that include appropriate investor protections and encourage capital 
formation?
    53. Should we amend Rule 504, as proposed, to include bad actor 
disqualification provisions that align with those included in Rule 
506(d) of Regulation D? Why or why not?
    54. As proposed, should issuers only be disqualified from reliance 
on Rule 504 for bad actor disqualifying events that occur after the 
effectiveness of any final rule amendments? Why or why not?
    55. If we adopt bad actor disqualification provisions for Rule 504 
offerings, should we require issuers to provide disclosure to 
purchasers of any bad actor disqualifying events that occur before 
effectiveness of any final rule amendments as proposed? Why or why not?
    56. Should we amend the method by which an issuer calculates 
compliance with the Rule 504 aggregate offering amount limitation to 
remove the reference to other offerings conducted pursuant to Section 
3(b)(1)? Or should we instead continue to require issuers to aggregate 
Rule 504 offerings with all offerings conducted within the prior 
twelve-month period pursuant to Section 3(b)(1) and/or in violation of 
Section 5(a) when calculating the offering amount limitation? Why or 
why not? Should offerings made in violation of Section 5(a) be 
aggregated in all instances?
    57. Are there additional changes to Rule 504 that would increase 
the general utility of the exemption or provide additional investor 
protections? If so, please explain.
    58. Should Rule 504 be available to Exchange Act reporting 
companies? Why or why not?
    59. Should securities sold in reliance on Rule 504(b)(1)(iii) 
pursuant to a state law exemption that permits general solicitation and 
general advertising so long as sales are made only to accredited 
investors be subject to the limitations on resale in Rule 502(d) and, 
as such, be deemed ``restricted securities'' for purposes of Rule 144? 
Alternatively, should we adopt a requirement, similar to proposed Rule 
147(e),\186\ that would require the securities to come to rest within 
such state by only prohibiting resales to out of state residents for a 
period of nine months after such securities are purchased by an 
investor? Why or why not?
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    \186\ See proposed Rule 147(e) and related discussion in Section 
II.B.4.c above.
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    60. Are there other amendments we should make to Rule 
504(b)(1)(iii) to address concerns about potential abuse of this 
provision? Please explain.
    61. Should we repeal Rule 504(b)(1)(iii), in light of our proposed 
revisions to Rule 147? With the exception of the unrestricted status of 
securities sold pursuant to Rule 504(b)(1)(iii), what value would this 
rule continue to provide to issuers and investors?

C. Continued Utility of Rule 505 as an Exemption From Registration

    As noted above, in light of the proposed changes to Rule 504, we 
also are seeking comment on the continued utility of Rule 505 as an 
exemption from registration. Rule 505 is used far less frequently than 
Rule 506, and an increase in the Rule 504 offering ceiling from $1 
million to $5 million could diminish its utility. Rule 505 is available 
to both non-reporting and

[[Page 69803]]

reporting issuers,\187\ so long as the aggregate offering amount does 
not exceed $5 million in any twelve-month period.\188\ An issuer 
relying upon Rule 505 may not engage in general solicitation or general 
advertising and securities issued under the exemption are restricted 
securities.\189\
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    \187\ Rule 505 is available to any issuer that is not an 
investment company.
    \188\ As with Rule 504, the aggregate offering price includes 
proceeds from offers and sales under Section 3(b) or in violation of 
Section 5(a) of the Securities Act. See note 176 above.
    \189\ See Rule 505(b), 17 CFR 230.505(b).
---------------------------------------------------------------------------

    Issuers relying upon Rule 505 are subject to additional conditions 
not required under Rule 504, such as the following:
     Sales to no more than 35 non-accredited investors and an 
unlimited number of accredited investors; \190\
---------------------------------------------------------------------------

    \190\ Rule 505(b)(2)(ii), 17 CFR 230.505(b)(2)(ii).
---------------------------------------------------------------------------

     Delivery of a disclosure document to non-accredited 
investors \191\ that generally contains the same information as 
included in a Securities Act registration statement.\192\
---------------------------------------------------------------------------

    \191\ Rule 505(b)(1), 17 CFR 230.505(b)(1). An issuer may decide 
what information to give to accredited investors, subject to the 
antifraud provisions of the federal securities laws. If the issuer 
provides information to accredited investors, it must make this 
information available to the non-accredited investors as well. As 
noted in Section III.B above, however, certain offerings conducted 
pursuant to Rule 504 also require the delivery of a disclosure 
document to investors, as required under state law.
    \192\ Financial statements required to be provided to non-
accredited investors under Rule 502(b) must be audited by a 
certified public accountant. As indicated in the note to Rule 
502(b)(1), ``issuers providing required information to non-
accredited investors should also consider providing such information 
to accredited investors as well, in view of the antifraud provisions 
of the federal securities laws.''
---------------------------------------------------------------------------

     Disqualification of felons and other ``bad actor'' from 
participating in the offering.\193\
---------------------------------------------------------------------------

    \193\ Rule 505(b)(2)(iii) refers to the disqualification 
provisions of Rule 262 of Regulation A. Issuers relying upon Rule 
506 of Regulation D are also subject to similar disqualification 
provisions under Rule 506(d) of Regulation D. While not currently 
applicable to Rule 504 offerings, we propose to adopt bad actor 
disqualification provisions for Rule 504 that would be substantially 
similar to those applicable to Rule 506 offerings. See discussion 
Section III.B above.
---------------------------------------------------------------------------

    With the exception of the offering limitation contained in Rule 
505, the Rule 505 requirements are substantially similar to the 
requirements of Rule 506.\194\ Nevertheless, issuers have 
overwhelmingly elected to rely upon Rule 506 instead of 505, including 
in offerings of up to $5 million.\195\ As discussed more fully in 
Section V below, data from Forms D filed with the Commission suggest 
that the preemption of state securities law registration and 
qualification requirements available only to issuers relying upon Rule 
506 may offset the unique features of Rule 504 or 505 offerings.\196\
---------------------------------------------------------------------------

    \194\ Unlike Rule 504, Rule 505 is available to companies that 
are subject to the requirements of Section 13 or 15(d) of the 
Exchange Act, as well as to development stage companies that either 
have no specific business plan or purpose or have indicated that 
their business plan is to engage in a merger or acquisition with an 
unidentified company or companies. Data suggests, however, that less 
the 4% of all issuers during the 2009-2014 period that conducted 
Rule 505 offerings were Exchange Act reporting companies (50 
companies out of a total of 1337 companies).
    \195\ For the period 2009 through 2014, 65,514 offerings on Form 
D were filed for offerings raising less than $5 million, of which 
1,368 filings reported an offering made in reliance upon Rule 505 of 
Regulation D, representing only 2% of all offerings made in reliance 
upon Regulation D during this time period, and 60,427 Form D filings 
reported an offering made in reliance upon Rule 506, representing 
approximately 92% of all offerings reporting reliance upon 
Regulation D during this time period. Variations in percentages are 
due to reporting errors and issuers ability to claim more than one 
exemption on the Form D. Issuers also overwhelmingly relied upon 
Rule 506 instead of Rule 504 when undertaking offerings for $1 
million or less. See discussion on the use of Rule 504 in Section 
V.B.4 below.
    \196\ See note 175 and related text in the discussion above. For 
the period 2009 through 2014, $5.773 trillion was raised under 
Regulation D of which 0.1% was raised in reliance on Rule 504, 0.1% 
was raised in reliance on Rule 505, and at least 99.2% was raised in 
reliance on Rule 506 (we do not have data with respect to the 
remaining 0.6% of aggregate capital raised under Regulation D). 
During the same time period, there were 118,846 new and continuing 
offerings under Regulation D of which 3.3% were made in reliance on 
Rule 504, 1.2% were made in reliance on Rule 505, and at least 94.8% 
were made in reliance on Rule 506 (we do not have data with respect 
to the remaining 0.7% of new and continuing offerings made under 
Regulation D during this time period). In 2014, Rule 505 offerings 
represented 1.48% of all new Regulation D offerings and 0.04% of all 
aggregate capital raised under Regulation D.
---------------------------------------------------------------------------

    Amending Rule 504 to allow for a larger aggregate offering amount 
of up to $5 million may reduce the incentives to use Rule 505 by 
issuers contemplating an exempt offering. Absent additional amendments 
to Regulation D, if we were to eliminate Rule 505, Regulation D would 
be limited to two offering exemptions, Rule 504 and Rule 506. Rule 504 
would be available only to non-reporting issuers \197\ that are not 
investment companies \198\ or development stage companies \199\ for 
offerings of up to $5 million in a twelve-month period and would permit 
general solicitation and the issuance of unrestricted securities in 
certain limited situations. Rule 506 would be available to all issuers 
without any aggregate offering limitations and would permit the 
issuance of only restricted securities, while allowing general 
solicitation under certain limited circumstances.\200\ We are seeking 
comment on the utility of Rule 505 in light of the proposed changes.
---------------------------------------------------------------------------

    \197\ See 17 CFR 230.504(a)(1).
    \198\ See 17 CFR 230.504(a)(2).
    \199\ See 17 CFR 230.504(a)(3).
    \200\ In such scenario, Rule 505 of Regulation D would be 
repealed and reserved.
---------------------------------------------------------------------------

Request for Comment
    62. Should we repeal Rule 505? Why or why not?
    63. If Rule 505 is retained, should it be modified in some manner? 
For example, if we amend the manner in which the aggregate offering 
amount limitation is calculated in Rule 504 offerings, should we make a 
corresponding change to the manner in which the Rule 505 aggregate 
offering amount limitation is calculated? \201\ What additional 
changes, if any, should be made to the rule?
---------------------------------------------------------------------------

    \201\ See discussion in Section III.B and request for comment 0 
above.
---------------------------------------------------------------------------

    64. Should Rule 505 be replaced with a new Securities Act exemption 
having, any, or all, of the following features:
     Early-stage capital formation as its primary purpose;
     eligibility only for non-Exchange Act reporting issuers;
     subject to the anti-fraud provisions of the federal 
securities laws and the civil liability provisions of Section 12(a)(2) 
of the Securities Act;
     exempting holders of the securities from the registration 
requirements of Section 12(g) of the Exchange Act;
     a relatively low maximum aggregate offering amount over a 
12-month period, such as $100,000;
     a limit on the maximum investment amount per investor, 
such as $2,000;
     a higher maximum investment amount for more sophisticated 
investors, based on criteria, such as net worth, net income or some 
other proxy for investment sophistication;
     ``covered security'' status under Section 18 of the 
Securities Act by either enacting a new ``safe harbor'' pursuant to 
Securities Act Section 4(a)(2) or by defining purchasers of securities 
issued in an offering pursuant to the exemption as ``qualified 
purchasers,'' pursuant to Securities Act Section 18(b)(3);
     additional or alternative criteria?
    65. Alternatively, whether or not we repeal Rule 505 and if, as 
proposed, we increase the aggregate offering amount that may be raised 
pursuant to Rule 504 to $5 million of securities in a twelve-month 
period, should the amendments to Rule 504 include some of the 
provisions currently required by Rule 505? If so, which ones and why? 
Should any such requirement of current Rule 505 only be required if the 
Rule 504

[[Page 69804]]

offering exceeds a certain aggregate offering amount of securities, 
such as the Rule 504 current annual offering limit of $1 million or 
some other amount?

IV. General Request for Comment

    We solicit comment, both specific and general, on each component of 
the proposals. We request and encourage any interested person to submit 
comments regarding:
     the proposals that are the subject of this release;
     additional or different revisions to the rules discussed 
above; and
     other matters that may have an effect on the proposals 
contained in this release.
    Comment is solicited from the point of view of both issuers and 
investors, as well as of capital formation facilitators, such as 
broker-dealers, and other regulatory bodies, such as state securities 
regulators. Any interested person wishing to submit written comments on 
any aspect of the proposal is requested to do so. With regard to any 
comments, we note that such comments are of particular assistance to us 
if accompanied by supporting data and analysis of the issues addressed 
in those comments. We urge commenters to be as specific as possible.

V. Economic Analysis

    This section analyzes the expected economic effects of the proposed 
amendments relative to the current baseline, which is the regulatory 
framework and state of the market \202\ in existence today, including 
current methods available to potential issuers to raise capital up to 
$5 million. We are mindful of the costs imposed by, and the benefits 
obtained from, our proposed amendments. Relative to this baseline, our 
analysis considers the anticipated benefits and costs for market 
participants affected by the proposed amendments as well as the impact 
of the proposed amendments on efficiency, competition, and capital 
formation.\203\ We also analyze the potential benefits and costs 
stemming from alternatives to the proposed rule amendments that we 
considered. Many of the benefits and costs discussed below are 
difficult to quantify, especially when analyzing the likely effects of 
the proposed amendments on efficiency, competition, and capital 
formation. For example, it is difficult to precisely estimate the 
extent to which the proposed amendments to Rule 147 would promote 
future reliance by issuers on this exemption, or the extent to which 
future use of Rule 147 would affect the use of other offering methods. 
Similarly, it is difficult to quantify the effect of the proposed 
amendments on investor protection. Therefore, much of the discussion in 
this section is qualitative in nature. However, where possible, we have 
attempted to quantify the expected effects of the proposed amendments.
---------------------------------------------------------------------------

    \202\ The term ``market'' as used throughout this economic 
analysis refers to capital markets in general, and where discussed 
in the context of a specific rule, relates to the provisions of the 
relevant exemption or safe harbor. We refer, for example, to the 
Rule 147 and Rule 504 exemptions as the Rule 147 and Rule 504 
markets because each of those rules' provisions prescribe 
requirements that determine who can participate and how the 
participants (issuers/investors/intermediaries) can engage in 
transactions under each exemption. Participants face different 
trade-offs when choosing between the markets created by each of the 
exemptions and safe harbors.
    \203\ Securities Act Section 2(b) requires us, when engaging in 
rulemaking that requires us to consider or determine whether an 
action is necessary or appropriate in the public interest, to 
consider, in addition to the protection of investors, whether the 
action will promote efficiency, competition, and capital formation. 
See 15 U.S.C. 77b(b).
---------------------------------------------------------------------------

A. Baseline

    The proposed amendments would primarily impact the financing market 
for startups and small businesses.\204\ The baseline for our economic 
analysis of the proposed amendments to Rule 147 and Rule 504--including 
the baseline for our consideration of the effects of the proposed 
amendments on efficiency, competition and capital formation--is the 
regulatory framework and market structure in existence today, in which 
startups and small businesses seeking to raise capital through 
securities offerings must register the offer and sale of securities 
under the Securities Act, unless they can rely on an existing exemption 
from registration under the federal securities laws. In addition to a 
description of the type and number of issuers that currently offer and 
sell securities in reliance on the Rule 147 and Rule 504 exemptions, 
our analysis includes a description of investors who purchase or may 
consider purchasing such securities and a discussion of the role of 
intermediaries in such offerings.
---------------------------------------------------------------------------

    \204\ In 2013, there were more than 5 million small businesses 
defined by the U.S. Census Bureau as having fewer than 500 paid 
employees. See U.S. Department of Commerce, United States Census 
Bureau, Business Dynamics Statistics, Data: Firm Characteristics 
(2013), available at http://www.census.gov/ces/dataproducts/bds/data_firm.html.
---------------------------------------------------------------------------

1. Current Market Participants
    As discussed above, existing Rule 147 is a safe harbor for 
complying with the intrastate offering exemption provided by Section 
3(a)(11) of the Securities Act. Consistent with the statutory 
exemption, Rule 147 imposes no offering amount limit but requires that 
issuers offer and sell securities to residents of the same state or 
territory in which the issuer is resident. In addition, issuers seeking 
to rely on the safe harbor must satisfy certain prescriptive threshold 
requirements to be considered ``doing business'' in-state. Existing 
Rule 504 limits the offering amount to $1 million in a 12-month period 
and permits general solicitation under certain conditions, such as that 
offers and sales are made exclusively in one or more states that 
provide for securities registration and the public filing and delivery 
to investors of a substantive disclosure document before sale.\205\ 
Table 1 summarizes the main characteristics of Rule 147 and Rule 504.
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    \205\ See Section III.A above.

[[Page 69805]]



                                             Table 1--Main Characteristics of Existing Rule 147 and Rule 504
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Issuer and
        Type of offering            Offering limit       Solicitation          investor       Filing requirement    Restriction on       Blue sky law
                                         \206\                               requirements                               resale            preemption
--------------------------------------------------------------------------------------------------------------------------------------------------------
Rule 147........................  None..............  Only intrastate     All issuers must    None..............  Interstate resales  No.
                                                       solicitation.       be incorporated                         are restricted
                                                                           and ``doing                             for nine months
                                                                           business'' in                           from the later of
                                                                           state.                                  the last sale in,
                                                                          All investors must                       or the completion
                                                                           be residents in                         of, the
                                                                           state..                                 offering.\207\
Rule 504........................  $1 million........  General             Excludes            File Form D.\209\   Restricted in some  No.
Regulation D....................                       solicitation        investment                              cases.\210\
                                                       permitted in        companies, blank-
                                                       certain             check companies,
                                                       cases.\208\         and Exchange Act
                                                                           reporting
                                                                           companies.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The proposed amendments to Rule 147 and Rule 504 would primarily 
affect securities issuers, particularly startups and small businesses 
that rely on unregistered offerings under these and other exemptions to 
raise capital, and accredited and non-accredited investors in 
unregistered offerings.
---------------------------------------------------------------------------

    \206\ Aggregate offering limit on securities sold within a 12-
month period.
    \207\ Rule 147(e), 17 CFR 230.147(e). Additional resale 
restrictions may apply under state securities laws, which typically 
restrict in-state resales for a period of one-year.
    \208\ No general solicitation or advertising is permitted unless 
the offering is registered in a state requiring the use of a 
substantive disclosure document or sold under a state exemption for 
sales to accredited investors with general solicitation.
    \209\ Filing is not a condition of the exemption, but it is 
required under Rule 503.
    \210\ Restricted unless the offering is registered in a state 
requiring the use of a substantive disclosure document or sold under 
a state exemption limiting sales only to accredited investors.
---------------------------------------------------------------------------

a. Issuers
i. Rule 147 Issuers
    Under current Rule 147, there are no restrictions on the type of 
issuers that can utilize the safe harbor, and there is no limit on the 
amount of capital that can be raised. However, there are in-state 
residency and eligibility requirements that an issuer must satisfy in 
order to rely on Rule 147. Eligible issuers are those that are 
incorporated or organized in-state, have their ``principal office'' in-
state, and can satisfy three 80% thresholds concerning their revenues, 
assets and use of net proceeds.
    While we do not have access to data on the number and size of 
offerings,\211\ the amount of capital raised, and the type of issuers 
currently relying on the Rule 147 safe harbor, the nature of the 
eligibility requirements leads us to believe that the rule is currently 
being used by U.S. incorporated firms that are likely small businesses 
seeking to raise small amounts of capital without incurring the costs 
of registering with the Commission.
---------------------------------------------------------------------------

    \211\ Unlike Regulation D, which requires the filing of a Form 
D, Rule 147 does not require any filing with the Commission, and we 
thus have no source of reliable data about the prevalence and scope 
of Rule 147 offerings.
---------------------------------------------------------------------------

    Currently, issuers that intend to conduct intrastate crowdfunding 
offerings are required to use Rule 147 by most of the states that have 
enacted crowdfunding provisions.\212\ Based on information from 
NASAA,\213\ as of September 2015, 29 states and the District of 
Columbia have enacted state crowdfunding provisions, and more states 
are expected to promulgate similar provisions in the near future. Since 
December 2011, when the first state (Kansas) enacted its crowdfunding 
provisions, 118 state crowdfunding offerings have been reported to be 
filed with the respective state regulator.\214\ Of these offerings, 102 
were reported to be approved or cleared, as of August 1, 2015. Most of 
the cleared offerings were in Georgia, Michigan, Oregon, Kansas and 
Indiana.
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    \212\ See http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-resource-center/intrastate-crowdfunding-directory/.
    \213\ See NASAA's Intrastate Crowdfunding Resource Center at 
http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-resource-center/. See also http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-resource-center/intrastate-crowdfunding-directory/.
    \214\ Id. The jurisdictions included in the estimate are 
Alabama, District of Columbia, Georgia, Idaho, Indiana, Kansas, 
Maine, Maryland, Massachusetts, Michigan, Oregon, Texas, Vermont, 
Washington and Wisconsin.
---------------------------------------------------------------------------

    Given that almost all the enacted state crowdfunding provisions 
currently exclude reporting companies and entities defined as an 
investment company under the Investment Company Act of 1940, we expect 
that issuers that rely on Rule 147 are likely operating companies 
(``non-fund issuers''). While information on the size of these issuers 
is not available, data from NASAA shows that most issuers are from 
varied industries such as agriculture, manufacturing, business 
services, retail, entertainment, and technology.
    We anticipate that many potential issuers of securities under 
proposed Rule 147, particularly those utilizing Rule 147 for intrastate 
crowdfunding, will continue to be small businesses, early stage firms 
and start-ups that are close to the ``idea'' stage of the business 
venture. Some of these issuers may lack business plans that are 
sufficiently developed to attract venture capitalists (VCs) or angel 
investors that invest in high risk ventures, or may not offer the 
profit potential or business model to attract such investors.\215\
---------------------------------------------------------------------------

    \215\ In this regard, a study of one large crowdfunding platform 
revealed that relatively few companies on that platform operate in 
technology sectors that typically attract VC investment activity. 
See Ethan R. Mollick, The Dynamics of Crowdfunding: An Exploratory 
Study (Working Paper) (June 26, 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2088298.
---------------------------------------------------------------------------

ii. Rule 504 and Rule 505 Issuers
    Rule 504 of Regulation D provides an exemption from registration 
under Section 3(b)(1) of the Securities Act for offerings that do not 
exceed $1 million during a 12-month period. An analysis of Form D 
filings indicates that reliance on Rule 504 exemptions has been 
declining over time. As shown in Figure 1, while offerings under Rule 
506 of Regulation D grew significantly from 1993 to 2014, offerings 
under Rule 504 and Rule 505 in 2014 were one quarter of 1993 levels. In 
addition, while offering activity under Rule 504 has been higher than 
under the Rule 505 exemption, the number of new Rule 504 offerings 
peaked in 1999, with 3,402 new offerings initiated, and steeply 
declined afterward. Compared to the early 1990s when Rule 504 offerings 
constituted approximately 28% of all

[[Page 69806]]

new Regulation D offerings, the proportion of Rule 504 offerings 
between 2009 and 2014 ranged between 3% and 4% of all new Regulation D 
offerings.
---------------------------------------------------------------------------

    \216\ Data is not readily available for the period 2002-2008 
during which Form D was a paper-based filing. The form became 
available electronically in March 2009. Since the data for year 2009 
is only for the period April to December, the number of new 
Regulation D offerings shown is underestimated for 2009.
[GRAPHIC] [TIFF OMITTED] TP10NO15.001

    The current limited use of the Rule 504 exemption and the 
predominance of Rule 506 are also evident when we consider the total 
amount raised in offerings under each of these exemptions. Overall, 
capital formation in the Rule 504 market constituted approximately 0.1% 
of the capital raised in all Regulation D offerings initiated during 
2009-2014.\217\ Considering only Regulation D offerings of up to $1 
million (the maximum amount that a Rule 504 offering can raise in a 
year) initiated by non-fund issuers, the share of Rule 504 offerings 
was slightly higher at 7%.
---------------------------------------------------------------------------

    \217\ See Unregistered Offerings White Paper.
---------------------------------------------------------------------------

    During the period 2009-2014, issuers relying on the Rule 504 
exemption were predominantly non-fund issuers. As shown in Table 2, 
less than 3% of new Rule 504 offerings during 2009-2014 were initiated 
by fund issuers.\218\ Similarly, between 2009 and 2014, the amounts 
raised by fund issuers in both new and continuing \219\ Rule 504 
offerings constituted a small proportion (1% to 6%) of amounts reported 
to be raised in all Rule 504 offerings.
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    \218\ Based on an analysis of Form D filings. Our analysis uses 
the same assumptions and methodologies described in Unregistered 
Offerings White Paper, note 174 above.
    \219\ These offerings were initiated in previous years and 
continued raising capital in subsequent years. In order to 
accurately capture the level of capital formation under the Rule 504 
exemption, we consider capital raised during a year by new offerings 
as well as incremental capital raised during the year by continuing 
offerings.

                              Table 2--Rule 504 Capital Raising Activity, 2009-2014
----------------------------------------------------------------------------------------------------------------
                                                           Proportion by       Total amount      Proportion by
                                          Number of      non-fund  issuers      raised ($      non-fund  issuers
                                          offerings               %              million)               %
----------------------------------------------------------------------------------------------------------------
2009................................                579                 98                 91                 94
2010................................                714                 99                131                 99
2011................................                721                 98                113                 99
2012................................                632                 98                109                 96
2013................................                599                 96                 97                 94
2014................................                544                 97                 94                 96
----------------------------------------------------------------------------------------------------------------

    Figure 2 shows the size of Rule 504 issuers during the period 2009-
2014.\220\ Of all the issuers that disclosed their size in their Form D 
filings (approximately 80% of all Rule 504 issuers), more than three 
quarters of

[[Page 69807]]

offerings were initiated by issuers that had no revenues, or had 
revenues or net asset values of less than $1 million. From this 
reported size, we believe that a vast majority of Rule 504 issuers 
likely consist of startups and small businesses. The small size of 
issuers is also reflected in the average age of issuers, as measured by 
years since incorporation. Based on Form D filings, 51% of Rule 504 
issuers initiated their offerings during the year of their 
incorporation or in the subsequent year. Another 14% of issuers 
initiated their offerings between two and three years since 
incorporation.\221\
---------------------------------------------------------------------------

    \220\ Based on an analysis of Form D filings.
    \221\ Id.
    [GRAPHIC] [TIFF OMITTED] TP10NO15.002
    
    Most Rule 504 issuers in the past five years reported to operate in 
the technology, real estate or other industry (Figure 3).\222\
---------------------------------------------------------------------------

    \222\ Id.
    [GRAPHIC] [TIFF OMITTED] TP10NO15.003
    
    As reported in Form D filings, during the period 2009-2014, Rule 
504 issuers had their principal place of business in California (22%), 
followed by Texas, New York, Florida, Colorado and Illinois, though 
most were incorporated in Delaware (19%), California (14%) and Nevada 
(10%). In addition, approximately 32% of the Rule 504 offerings had 
separate states of incorporation and principal places of business. 
While only approximately 2%

[[Page 69808]]

of Rule 504 offerings were initiated by foreign-incorporated issuers, a 
larger number (5%) reported their principal place of business to be 
outside the United States. In addition, approximately 90% of issuers in 
the Rule 504 market initiated only one offering, and approximately 83% 
of such offerings were of equity securities during the period 2009-
2014.
b. Investors
    Currently, Rule 147 limits offers and sales to residents of the 
same state as the issuer. There are no other limitations on who can 
invest in Rule 147 and Rule 504 offerings. Although the Commission does 
not track data concerning investors participating in Rule 147 
offerings, data from Form D filings provide some insights into the 
number and type of investors in Rule 504 offerings.
    Table 3 below, shows that almost 31,000 investors participated in 
new Rule 504 offerings initiated during the period 2009-2014.\223\ An 
analysis of Form D filings indicates that the average and median number 
of investors in Rule 504 was approximately 11 and 4, respectively.
---------------------------------------------------------------------------

    \223\ Based on an analysis of Form D filings. See also 
Unregistered Offerings White Paper.

                     Table 3--Number and Type of Investors in Rule 504 Offerings, 2009-2014
----------------------------------------------------------------------------------------------------------------
                                                                                                % Offerings with
                                                          Total investors   Average number of    non-accredited
                                                                                investors          investors
----------------------------------------------------------------------------------------------------------------
2009...................................................              4,004                  9                 53
2010...................................................              5,427                 10                 54
2011...................................................              5,512                 11                 57
2012...................................................              6,295                 13                 58
2013...................................................              5,573                 13                 61
2014...................................................              3,996                 10                 60
2009-2014..............................................             30,807                 11                 57
----------------------------------------------------------------------------------------------------------------

    Offerings that involved non-accredited investors between 2009 and 
2014 were typically smaller and, on average, had fewer investors than 
those offerings that involved only accredited investors. The presence 
of non-accredited investors was larger in Rule 504 offerings, where the 
number of non-accredited investors is not limited, than in Rule 505 or 
Rule 506 offerings, where the number of non-accredited investors is 
limited to 35. Table 3 above shows that approximately 57% of Rule 504 
offerings during 2009-2014 reported having sold, or intending to sell, 
to non-accredited investors.\224\ These offerings, on average, had 16 
investors, compared to 8 investors in Rule 504 offerings that reported 
not having sold or intending to sell to non-accredited investors.\225\
---------------------------------------------------------------------------

    \224\ Id.
    \225\ Based on an analysis of Form D filings.
---------------------------------------------------------------------------

    We believe, given investment limitations under state crowdfunding 
provisions, that many investors affected by the proposed amendments to 
Rule 147 would likely be individual retail investors whose broad access 
to potentially riskier investment opportunities in early-stage ventures 
is currently limited, either because they do not have the necessary 
accreditation or sophistication to invest in most private offerings or 
because they do not have sufficient funds to participate as angel 
investors. Intrastate crowdfunding offerings may provide retail 
investors with additional investment opportunities, although the extent 
to which they invest in such offerings will likely depend on their view 
of the potential return on investment as well as the potential risks, 
including fraud.
    In contrast, larger, more sophisticated or well-funded investors 
may be less likely to invest in intrastate crowdfunding offerings. The 
relatively low offering amount limits, in-state investor residency 
requirements, and low investment limits for crowdfunding investors 
under state laws \226\ may make these offerings less attractive for 
professional investors, including VCs and angel investors.\227\ While 
an intrastate crowdfunding offering can bring an issuer to the 
attention of these investors, it is possible that professional 
investors would prefer to invest in offerings relying on Rule 506, 
which are not subject to the investment limitations applicable to 
crowdfunding.
---------------------------------------------------------------------------

    \226\ Most state crowdfunding provisions allow up to $2 million 
offering size, and a maximum investment of $10,000 by non-accredited 
investors.
    \227\ An observer suggests that, unlike angels, VCs may be less 
interested in crowdfunding because, if VCs rely on crowdfunding 
sites for their deal flow, it would be difficult to justify charging 
a 2% management fee and 20% carried interest to their limited 
partners. See Ryan Caldbeck, Crowdfunding_Why Angels, Venture 
Capitalists And Private Equity Investors All May Benefit, Forbes, 
Aug. 7, 2013.
---------------------------------------------------------------------------

c. Intermediaries
    Issuers of private offerings may use broker-dealers to help them 
with various aspects of the offering and to help ensure compliance with 
the ban on general solicitation and advertising that exists for most 
private offerings. Private offerings can also involve finders and 
investment advisers who connect issuers with potential investors for a 
fee.\228\ We do not have information on the extent of intermediary use 
in Rule 147 offerings; however, an analysis of Form D filings indicates 
that intermediaries are used less frequently in Rule 504 offerings than 
in registered offerings. Approximately 20% of Rule 504 offerings 
reported using an intermediary during the period 2009-2014. The average 
commissions and fees paid by Rule 504 issuers that reported using an 
intermediary was approximately 6% of the offer amount.
---------------------------------------------------------------------------

    \228\ Depending on their activities, these persons may need to 
be registered as broker-dealers.
---------------------------------------------------------------------------

    Although we are unable to predict the use of broker-dealers, 
transfer agents, investment advisers and finders in private offerings 
as a result of the proposed rules, data on the use of broker-dealers 
and finders in the Rule 506 market suggests that they may not currently 
play a large role in private offerings. Form D filings indicate that 
approximately 21% of Rule 506 offerings, including 15% of Rule 506 
offerings initiated by non-fund issuers, used an intermediary during 
2009-2014.\229\ The use of a broker-dealer or a finder increased with 
offering size, while the average total fee declined with offering 
size.\230\ We base these estimates, however, only on available data 
from the Regulation D market. It is

[[Page 69809]]

possible that issuers engaging in other types of private offerings, for 
which data is not available to us, may use broker-dealers and finders 
more frequently.\231\
---------------------------------------------------------------------------

    \229\ See Section IV(c) in Unregistered Offerings White Paper.
    \230\ Id. Intermediaries participated in 16% of Rule 506 
offerings of up to $1 million and 30% of offerings of more than $50 
million. The average total fee (commission plus finder fee) paid by 
issuers conducting offerings of up to $1 million was 6.5% while the 
average total fee paid by issuers conducting offerings of more than 
$50 million was 1.9%.
    \231\ A number of states that have enacted crowdfunding 
provisions require that the offer and sale of securities by means of 
intrastate crowdfunding be conducted through a funding portal or a 
broker-dealer. Some intrastate crowdfunding provisions require the 
offering portals to be registered generally with the state, or as a 
broker-dealer. Based on FOCUS Reports filed with the Commission, as 
of December 2014, there were 4,267 registered broker-dealers, with 
average total assets of approximately $1.1 billion per broker-
dealer. The aggregate assets of these registered broker-dealers 
totaled approximately $4.9 trillion. See Crowdfunding Adopting 
Release for a more detailed discussion of intermediaries in 
crowdfunding offerings.
---------------------------------------------------------------------------

2. Alternative Methods of Raising up to $5 Million of Capital
    The potential economic impact of the proposed amendments, including 
their effects on efficiency, competition and capital formation, will 
depend primarily on the extent of use of the amended Rule 147 and Rule 
504 exemptions, and how these methods compare to alternative methods 
that startups and small businesses can use for raising capital.
    As the proposed amendments to Rule 504 would permit offerings up to 
$5 million by all types of issuers, the analysis below discusses 
alternatives available for startups and small businesses to access up 
to $5 million in capital. Current state crowdfunding provisions, most 
of which require issuers to rely on Rule 147 for federal exemption, 
have offering limits up to $4 million and restrict private funds and 
investment companies from utilizing crowdfunding provisions. Our 
analysis below, therefore, also subsumes a discussion of alternative 
sources for non-fund issuers to raise capital up to $4 million.\232\
---------------------------------------------------------------------------

    \232\ While offerings greater than $5 million that are 
registered or exempt under state law, subject to certain conditions, 
could be raised under amended Rule 147, and fund issuers would not 
be excluded from using the exemption, we believe that the impact of 
the proposed amendments on larger offerings and fund offerings is 
not likely to be significant, given the local nature of offerings 
and also current state regulations for larger offerings. See Section 
V.B (discussing the impact of the proposed rule amendments is 
analyzed more in detail).
---------------------------------------------------------------------------

    Startups and small businesses can potentially access a variety of 
external financing sources in the capital markets through, for example, 
registered or unregistered offerings of debt, equity or hybrid 
securities and bank loans. Issuers seeking to raise capital must 
register the offer and sale of securities under the Securities Act or 
qualify for an exemption from registration under the federal securities 
laws. Registered offerings, however, are generally too costly to be 
viable alternatives for startups and small businesses. Issuers 
conducting registered offerings must pay Commission registration fees, 
legal and accounting fees and expenses, transfer agent and registrar 
fees, costs associated with periodic reporting requirements and other 
regulatory requirements, and various other fees. Two surveys concluded 
that the average initial compliance cost associated with conducting an 
initial public offering is $2.5 million, followed by an ongoing 
compliance cost for issuers, once public, of $1.5 million per 
year.\233\ Moreover, issuers conducting registered offerings usually 
pay underwriter fees, which average approximately 7% for initial public 
offerings, approximately 5% for follow-on equity offerings and 
approximately 1-1.5% for public bond issuances.\234\ Hence, for an 
issuer seeking to raise less than $5 million, a registered offering 
typically may not be economically feasible.
---------------------------------------------------------------------------

    \233\ See IPO Task Force, Rebuilding the IPO On-Ramp, at 9 (Oct. 
20, 2011) for the two surveys, available at http://www.sec.gov/info/smallbus/acsec/rebuilding_the_ipo_on-ramp.pdf (``IPO Task Force''). 
The estimates should be interpreted with the caveat that most firms 
in the IPO Task Force surveys likely raised more than $1 million. 
The IPO Task Force surveys do not provide a breakdown of costs by 
offering size. However, compliance related costs of an initial 
public offering and subsequent compliance related costs of being a 
reporting company likely have a fixed cost component that would 
disproportionately affect small offerings.
     Title I of the JOBS Act provided certain accommodations to 
issuers that qualify as emerging growth companies (EGCs). According 
to a recent working paper, the underwriting, legal and accounting 
fees of EGC and non-EGC initial public offerings were similar (based 
on a time period from April 5, 2012 to April 30, 2014). For a median 
EGC initial public offering, gross spread comprised 7% of proceeds 
and accounting and legal fees comprised 2.4% of proceeds. See Susan 
Chaplinsky, Kathleen W. Hanley, and S. Katie Moon, 2014, ``The JOBS 
Act and the Costs of Going Public,'' working paper, August 14, 2014, 
available at http://ssrn.com/abstract_id=2492241.
    \234\ See, e.g., Hsuan-Chi Chen and Jay R. Ritter, ``The Seven 
Percent Solution,'' 55 J. Fin. 1105-1131 (2000); Mark Abrahamson, 
Tim Jenkinson, and Howard Jones, ``Why Don't U.S. Issuers Demand 
European Fees for IPOs?'' 66 J. Fin. 2055-2082 (2011); Shane A. 
Corwin, ``The Determinants of Underpricing for Seasoned Equity 
Offers,'' 58 J. Fin. 2249-2279 (2003); Lily Hua Fang, ``Investment 
Bank Reputation and the Price and Quality of Underwriting 
Services,'' 60 J. Fin. 2729-2761 (2005); Rongbing Huang and Donghang 
Zhang, ``Managing Underwriters and the Marketing of Seasoned Equity 
Offerings,'' 46 J. Fin. Quant. Analysis 141-170 (2011); Stephen J. 
Brown, Bruce D. Grundy, Craig M. Lewis and Patrick Verwijmeren, 
``Convertibles and Hedge Funds as Distributors of Equity Exposure,'' 
25 Rev. Fin. Stud. 3077-3112 (2012).
---------------------------------------------------------------------------

a. Exempt Offerings
    For startups and small businesses that can potentially access 
capital under the Rule 147 safe harbor and Rule 504 exemption, 
offerings under other existing exemptions from registration may 
represent alternative methods of raising capital. For example, startups 
and small businesses could rely on current exemptions and safe harbors, 
such as Section 3(a)(11), Section 4(a)(2),\235\ Regulation A,\236\ and 
Rule 506 of Regulation D.\237\
---------------------------------------------------------------------------

    \235\ Securities Act Section 4(a)(2) provides that the 
provisions of the Securities Act shall not apply to ``transactions 
by an issuer not involving a public offering.''
    \236\ Regulation A provides a conditional exemption from 
registration for certain small issuances. We recently adopted 
amendments to Regulation A, which became effective on June 19, 2015. 
See 2015 Regulation A Release.
    \237\ Rule 506(b) of Regulation D provides a nonexclusive safe 
harbor from registration for certain types of securities offerings. 
Rule 506(c) of Regulation D is a new exemption from registration 
that the Commission adopted to implement Section 201(a) of the JOBS 
Act.
---------------------------------------------------------------------------

    Each of these exemptions, however, includes restrictions that may 
limit its suitability for startups and small businesses seeking to 
raise capital up to $5 million. Table 4 below lists the main 
requirements of these exemptions.

                                            Table 4--Other Exemptions Currently Available for Capital Raising
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Issuer and
        Type of offering            Offering limit       Solicitation          investor             Filing          Restriction on       Blue sky law
                                         \238\                               requirements         requirement           resale            preemption
--------------------------------------------------------------------------------------------------------------------------------------------------------
Section 3(a)(11)................  None..............  All offerees must   All issuers and     None..............  No \239\..........  No.
                                                       be resident in      investors must be
                                                       state.              resident in state.
Section 4(a)(2).................  None..............  No general          Transactions by an  None..............  Restricted          No.
                                                       solicitation.       issuer not                              securities.
                                                                           involving any
                                                                           public offering
                                                                           \240\.

[[Page 69810]]

 
Regulation A....................  Tier 1: up to $20   Testing the waters  U.S. or Canadian    File testing the    No................  Tier 1: No Tier 2:
                                   million with $6     permitted both      issuers,            waters materials,                       Yes
                                   million limit on    before and after    excluding           Form 1-A for
                                   secondary sales     filing the          investment          Tiers 1 and 2
                                   by affiliates of    offering            companies, blank-   offerings; file
                                   the issuer;         statement.          check companies,    annual, semi-
                                  Tier 2: up to $50                        reporting           annual, and
                                   million with $15                        companies, and      current reports
                                   million limit on                        issuers of          for Tier 2; file
                                   secondary sales                         fractional          exit report for
                                   by affiliates of                        undivided           Tier 1 and to
                                   the issuer..                            interests in oil    suspend or
                                                                           or gas rights, or   terminate
                                                                           similar interests   reporting for
                                                                           in other mineral    Tier 2.
                                                                           rights \241\.
Rule 505                          $5 million........  No general          Unlimited           File Form D \242\.  Restricted          No.
Regulation D....................                       solicitation.       accredited                              securities.
                                                                           investors and up
                                                                           to 35 non-
                                                                           accredited
                                                                           investors.
Rule 506(b)                       None..............  No general          Unlimited           File Form D \243\.  Restricted          Yes.
Regulation D....................                       solicitation.       accredited                              securities.
                                                                           investors and up
                                                                           to 35 non-
                                                                           accredited
                                                                           investors.
Rule 506(c)                       None..............  General             Unlimited           File Form D \245\.  Restricted          Yes.
Regulation D....................                       solicitation is     accredited                              securities.
                                                       permitted,          investors; no non-
                                                       subject to          accredited
                                                       certain             investors.
                                                       conditions \244\.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    While we do not have complete data on offerings relying on an 
exemption under Section 3(a)(11) or Section 4(a)(2), certain data 
available from Regulation D and Regulation A filings allow us to gauge 
how frequently issuers seeking to raise up to $5 million use these 
exemptions. Based on Form D filings from 2009 to 2014, a substantial 
number of issuers chose to raise capital by relying on Rule 506(b), 
even though their offering size would qualify for an exemption under 
Rule 504 or Rule 505.\246\ As shown below, in the upper part of Table 5 
reporting the number of Regulation D offerings by all types of issuers, 
most of the issuers made offers for amounts of up to $1 million from 
2009 to 2014. Most of the offerings up to $5 million rely on the Rule 
506(b) exemption. The lower part of Table 5 shows a similar pattern for 
the number of offerings by non-fund issuers only. The overwhelming 
majority of non-fund issuers (approximately 78%) for offerings less 
than $5 million were five years or younger, and 68% of such issuers 
were two years or younger, with a median age of approximately one year. 
More than 93% of the non-fund issuers that made Regulation D offerings 
with offer sizes of $5 million or less during this period were 
organized as either a corporation or a limited liability company. 
Almost 23% reported no revenues, while approximately 21% had revenues 
of less than $5 million.\247\
---------------------------------------------------------------------------

    \238\ Aggregate offering limit on securities sold within a 
twelve-month period.
    \239\ Although Section 3(a)(11) does not have explicit resale 
restrictions, the Commission has explained that ``to give effect to 
the fundamental purpose of the exemption, it is necessary that the 
entire issue of securities shall be offered and sold to, and come to 
rest only in the hands of residents within the state.'' See 1961 
Release. State securities laws, however, may have specific resale 
restrictions. Securities Act Rule 147, a safe harbor under Section 
3(a)(11), limits resales to persons residing in-state for a period 
of 9 months after the last sale by the issuer. [17 CFR 230.147]
    \240\ Section 4(a)(2) of the Securities Act provides a statutory 
exemption for ``transactions by an issuer not involving any public 
offering.'' See SEC v. Ralston Purina Co., 346 U.S. 119 (1953) 
(holding that an offering to those who are shown to be able to fend 
for themselves is a transaction ``not involving any public 
offering.'')
    \241\ The Regulation A exemption also is not available to 
companies that have been subject to any order of the Commission 
under Exchange Act Section 12(j) entered within the past five years; 
have not filed ongoing reports required by the regulation during the 
preceding two years, or are disqualified under the regulation's 
``bad actor'' disqualification rules.
    \242\ Filing is not a condition of the exemption, but it is 
required under Rule 503.
    \243\ Filing is not a condition of the exemption, but it is 
required under Rule 503.
    \244\ General solicitation and general advertising is permitted 
under Rule 506(c). All purchasers must be accredited investors and 
the issuer must take reasonable steps to verify accredited investor 
status.
    \245\ Filing is not a condition of the exemption, but it is 
required under Rule 503.
    \246\ See Unregistered Offerings White Paper. This tendency 
could, in part, be attributed to two features of Rule 506: 
preemption from state registration (``blue sky'') requirements and 
an unlimited offering amount. See also GAO Report.
    \247\ These percentages could be higher because almost 45% of 
the Regulation D issuers declined to disclose their size.

                  Table 5--Number of Regulation D and Regulation A Offerings By Size, 2009-2014
----------------------------------------------------------------------------------------------------------------
                                                                   Offering size
                                 -------------------------------------------------------------------------------
                                                      $1-$2.5
                                   <=$1 million       million     $2.5-5 million   $5-50 million   >$50 million
----------------------------------------------------------------------------------------------------------------
All offerings:
    Rule 504....................           3,719

[[Page 69811]]

 
    Rule 505....................             525             450             393
    Rule 506(b).................          29,751          15,805          13,562          26,847          11,942
    Rule 506(c).................             710             304             295             533             161
                                 -------------------------------------------------------------------------------
    Total.......................          34,705          16,559          14,250          27,380          12,103
----------------------------------------------------------------------------------------------------------------
Regulation A....................               5               4              29
Non-fund offerings:
    Rule 504....................           3,643
    Rule 505....................             501             432             342
    Rule 506(b).................          27,106          14,113          11,633          18,670           2,733
    Rule 506(c).................             588             261             270             419              89
                                 -------------------------------------------------------------------------------
    Total.......................          31,838          14,806          12,245          19,089           2,822
----------------------------------------------------------------------------------------------------------------
Note: Data based on Form D and Form 1-A filings from 2009 to 2014. We consider only new offerings and exclude
  offerings with amount sold reported as $0 on Form D. Data on Rule 506(c) offerings covers the period from
  September 23, 2013 (the day the rule became effective) to December 31, 2014. We also use the maximum amount
  indicated in Form 1-A to determine offering size for Regulation A offerings.

    The table above also includes the number of Regulation A offerings 
by size. From 2009 to 2014, 38 issuers relied on Regulation A for 
offerings of up to $5 million.\248\ This data does not reflect the 
recent amendments to Regulation A adopted by the Commission on March 
25, 2015. The amendments allow issuers to raise up to $50 million over 
a 12-month period and preempt state registration requirements for 
certain Regulation A offerings (Tier 2 offerings). As these amendments 
became effective only recently, more time is needed to assess how the 
changes in Regulation A will affect capital raising by small 
issuers.\249\
---------------------------------------------------------------------------

    \248\ We only consider offerings with offering statements that 
have been qualified by the Commission. For purposes of counting 
filings, we exclude amendments or multiple 1-A filings by the same 
issuer in a given year. For purposes of determining the offering 
size for Regulation A offerings, we use the maximum amount indicated 
on the latest pre-qualification Form 1-A or amended Form 1-A. We 
reclassify two offerings that are dividend reinvestment plans with 
uncertain offering amounts as having the maximum permitted offering 
amount.
    \249\ See 2015 Regulation A Adopting Release.
---------------------------------------------------------------------------

b. Regulation Crowdfunding
    The analysis above does not include securities-based crowdfunding 
transactions under the Regulation Crowdfunding exemption. Under these 
rules, which are not yet in effect, offerings pursuant to Regulation 
Crowdfunding are limited to a maximum amount of $1 million over a 12-
month period and are subject to ongoing disclosure requirements. 
Securities issued pursuant to these rules can be sold to an unlimited 
number of investors (subject to certain investment limits), are freely 
tradable after one year, and can be offered and sold across states 
without state registration. In addition to the existing regulatory 
scheme of exemptions and safe harbors described above, Regulation 
Crowdfunding will provide a new exemption from the registration 
requirements of the Securities Act. Once effective, this exemption will 
provide startups and small businesses with an alternate source for 
raising up to $1 million in capital in a 12-month period through 
certain securities-based crowdfunding transactions. Unlike intrastate 
crowdfunding provisions enacted at the state level, the new federal 
crowdfunding exemption would allow interstate offerings. Table 6 below 
presents a comparison of the provisions of Regulation Crowdfunding and 
intrastate crowdfunding that rely on current Rule 147 for federal 
exemption.

 Table 6--Intrastate Crowdfunding and Regulation Crowdfunding Provisions
------------------------------------------------------------------------
                                     State level
                                    crowdfunding +        Regulation
                                   current rule 147   crowdfunding \251\
                                        \250\
------------------------------------------------------------------------
Investor Base..................  All investors,       All investors, all
                                  resident in- state.  states.
State Registration.............  Exemption provided   Preemption.
                                  by state.
Issuer Incorporation/Residency   Issuer should be     Excludes foreign
 Limitations.                     incorporated and     private issuers.
                                  ``doing-business''
                                  in state.
Excluded Issuers...............  Exchange Act         Exchange Act
                                  reporting            reporting
                                  companies,           companies,
                                  investment           investment
                                  companies and        companies, pooled
                                  blank check          investment funds,
                                  companies (under     and blank check
                                  most state           companies.
                                  provisions).
Offering Size Limits...........  $250,000--$4         Up to $1 million.
                                  million, depending
                                  on state. Average
                                  (median) limit:
                                  $1.6 ($2) million.
Security Type..................  Equity and debt in   Any security.
                                  some states;
                                  equity only in
                                  other states; any
                                  security in some
                                  other states.

[[Page 69812]]

 
Audited Financials Requirement.  Most states, if      Required for
                                  offer greater than   offerings greater
                                  $1 million.          than $500,000
                                                       with the
                                                       exception of
                                                       first-time
                                                       crowdfunding
                                                       issuers offering
                                                       more than
                                                       $500,000 but not
                                                       more than
                                                       $1,000,000, who
                                                       are permitted to
                                                       provide financial
                                                       statements
                                                       reviewed by an
                                                       independent
                                                       accountant,
                                                       unless the issuer
                                                       has audited
                                                       statements
                                                       otherwise
                                                       available.
                                                       Reviewed
                                                       financial
                                                       statements are
                                                       required for
                                                       offerings greater
                                                       than $100,000 but
                                                       not more than
                                                       $500,000, unless
                                                       the issuer has
                                                       audited
                                                       statements
                                                       otherwise
                                                       available.
General Solicitation...........  Allowed but only to  Allowed with
                                  investors resident   limitations on
                                  in state.            advertising.
Investment Limits..............  $2,500-$10,000,      (a) the greater of
                                  depending on         $2,000 or 5% of
                                  state, for non-      the lesser of the
                                  accredited           investor's annual
                                  investors.           income or net
                                 None, in most         worth if either
                                  states, for          annual income or
                                  accredited           net worth is less
                                  investors.           than $100,000, or
                                                       (b) 10% of the
                                                       lesser of the
                                                       investor's annual
                                                       income or net
                                                       worth if both
                                                       annual income and
                                                       net worth are
                                                       $100,000 or more,
                                                       subject to
                                                       investment cap of
                                                       $100,000.
Restrictions on Resale.........  Interstate resales   12-month resale
                                  restricted for       limitation;
                                  nine months \252\.   resale within one
                                                       year to issuer
                                                       and certain
                                                       investors.
Exemption from Section 12(g)     No exemption.......  Exempted, provided
 Registration Requirements.                            that the issuer
                                                       is current in its
                                                       ongoing annual
                                                       reports required
                                                       pursuant to Rule
                                                       202 of Regulation
                                                       Crowdfunding, has
                                                       total assets as
                                                       of the end of its
                                                       last fiscal year
                                                       not in excess of
                                                       $25 million, and
                                                       has engaged the
                                                       services of a
                                                       transfer agent
                                                       registered with
                                                       the Commission
                                                       pursuant to
                                                       Section 17A of
                                                       the Exchange Act.
------------------------------------------------------------------------

c. Private Debt Financing
    While equity-based financing, including principal owner equity, 
accounts for a significant proportion of the total capital of a typical 
small business, other sources of capital for startups and small 
businesses include loans from commercial banks, finance companies and 
other financial institutions, business credit cards and credit 
lines.\253\
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    \250\ Information based on provisions reflective of most states 
that have enacted crowdfunding provisions. See http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-resource-center/intrastate-crowdfunding-directory/.
    \251\ See Regulation Crowdfunding Adopting Release.
    \252\ Rule 147(e), 17 CFR 230.147(e). States may impose 
additional resale restrictions.
    \253\ Using data from the 1993 Survey of Small Business Finance, 
one study indicates that financial institutions account for 
approximately 27% of small firms' borrowings. See Allen N. Berger 
and Gregory F. Udell, The Economics of Small Business Finance: The 
Roles of Private Equity and Debt Markets in the Financial Growth 
Cycle, 22 J. Banking & Fin. 613 (1998). See also 1987, 1993, 1998 
and 2003 Surveys of Small Business Finances, available at http://www.federalreserve.gov/pubs/oss/oss3/nssbftoc.htm. The Survey of 
Small Business Finances was discontinued after 2003. Using data from 
the Kauffman Foundation Firm Surveys, one study finds that 44% of 
startups use loans from financial institutions. See Rebel A. Cole 
and Tatyana Sokolyk, How Do Start-Up Firms Finance Their Assets? 
Evidence from the Kauffman Firm Surveys (2012), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2028176.
---------------------------------------------------------------------------

    For example, a 2014 study reports that startups frequently resort 
to bank financing early in their lifecycle.\254\ The study finds that 
businesses rely heavily in the first year after formation on external 
debt sources such as bank financing, mostly in the form of personal and 
commercial bank loans, business credit cards, and credit lines. Another 
recent report, however, shows a decline in bank lending to small 
businesses, which fell by $100 billion from 2008 to 2011.\255\ This 
report also shows that less than one-third of small businesses reported 
having a business bank loan by 2012. Similarly, an FDIC report shows 
that, as of June 2014, small business lending, specifically business 
loans of up to $1 million, by FDIC-insured depository institutions 
amounted to approximately $590 billion, which is 17% lower than the 
2008 level.\256\
---------------------------------------------------------------------------

    \254\ See Robb, A., and D. Robinson, 2014, The Capital Structure 
Decisions of New Firms, Review of Financial Studies 27(1), pp. 153-
179 (``Robb'').
    \255\ See The Kauffman Foundation, 2013 State of 
Entrepreneurship Address (Feb. 5, 2013), available at http://
www.kauffman.org/~/media/kauffman_org/
research%20reports%20and%20covers/2013/02/soe%20report_2013pdf.pdf. 
The report cautions against prematurely concluding that banks are 
not lending enough to small businesses as the sample period of the 
study includes the most recent recession.
    \256\ We define small business loans to include commercial and 
industrial loans of up to $1 million and loans secured by nonfarm 
nonresidential properties and commercial and industrial loans of up 
to $1 million to U.S. addressees. See Federal Deposit Insurance 
Corporation, Statistics on Depository Institutions Report, available 
at http://www2.fdic.gov/SDI/SOB/ (``FDI Statistics'').
---------------------------------------------------------------------------

    An earlier study by Federal Reserve Board staff covering the pre-
recessionary period suggests that 60% of small businesses had 
outstanding credit in the form of a credit line, a loan or a capital 
lease.\257\ These loans were borrowed from two types of financial 
institutions: Depositary and non-depositary institutions (e.g., finance 
companies, factors or leasing companies).\258\ Lines of credit were the 
most widely used type of credit.\259\ Other types included mortgage 
loans, equipment loans, and motor vehicle loans.\260\
---------------------------------------------------------------------------

    \257\ See Federal Reserve Board, Financial Services Used by 
Small Businesses: Evidence from the 2003 Survey of Small Business 
Finances (October 2006), available at http://www.federalreserve.gov/pubs/bulletin/2006/smallbusiness/smallbusiness.pdf (``2003 
Survey'').
    \258\ See Rebel Cole, What Do We Know About the Capital 
Structure of Privately Held Firms? Evidence from the Surveys of 
Small Business Finance (Working Paper) (Feb. 2013), available at 
http://onlinelibrary.wiley.com/doi/10.1111/fima.12015/pdf
    \259\ See 2003 Survey, note 257 (estimating that 34% of small 
businesses use lines of credit).
    \260\ Id.
---------------------------------------------------------------------------

    Small businesses may also receive funding from various loan 
guarantee programs of the Small Business Administration (``SBA''), 
which makes credit more accessible to small businesses by either 
lowering the interest rate of the loan or enabling a market-based loan 
that a lender would

[[Page 69813]]

not be willing to provide, absent a guarantee.\261\ SBA loan programs 
include 7(a) loans,\262\ and CDC/504 loans.\263\ For example, in fiscal 
year 2014, the SBA supported approximately $28.7 billion in 7(a) and 
CDC/504 loans distributed to approximately 51,500 small 
businesses.\264\ SBA guaranteed loans, however, currently account for a 
relatively small share (18%) of the balances of small business loans 
outstanding.\265\
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    \261\ Numerous states also offer a variety of small business 
financing programs, such as Capital Access Programs, collateral 
support programs and loan guarantee programs. These programs are 
eligible for support under the State Small Business Credit 
Initiative, available at http://www.treasury.gov/resource-center/sb-programs/Pages/ssbci.aspx.
    \262\ 15 U.S.C. 631 et seq. 7(a) loans provide small businesses 
with financing guarantees for a variety of general business purposes 
through participating lending institutions.
    \263\ 15 U.S.C. 695 et seq. The CDC/504 loans are made available 
through ``certified development companies'' or ``CDCs'', typically 
structured with the SBA providing 40% of the total project costs, a 
participating lender covering up to 50% of the total project costs 
and the borrower contributing 10% of the project costs.
    \264\ See U.S. Small Business Administration, FY 2016 
Congressional Budget Justification and FY 2014 Annual Performance 
Report, available at https://www.sba.gov/content/fiscal-year-2016-congressional-budget-justificationannual-performance-report (``2014 
Annual Performance Report''). SBA also offers the Microloan program, 
which provides funds to specially designated intermediary lenders 
that administer the program for eligible borrowers. The maximum loan 
amount is $50,000, but the average is about $13,000. See Microloan 
Program, U.S. Small Business Administration, available at http://www.sba.gov/content/microloan-program.
    \265\ As of the end of fiscal year 2014, the SBA guaranteed 
business loans outstanding (including 7(a) and 504 loans) equaled 
$107.5 billion. See Small Business Administration Unpaid Loan 
Balances by Program, available at https://www.sba.gov/sites/default/files/files/WDS_Table1_UPB_Report.pdf. This comprises approximately 
18% of the approximately $590 billion in outstanding small business 
loans for commercial real estate and commercial and industrial loans 
discussed above. In 2014, the SBA expanded eligibility for loans 
under its business loan programs. See SBA 504 and 7(a) Loan Programs 
Updates (Mar. 21, 2014) [79 FR 15641 (Apr. 21, 2014)]. In addition 
to loan guarantees, the SBA program portfolio also includes direct 
business loans, which are mainly microloans (outstanding direct 
business loans equaled $137.1 billion), and disaster loans.
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    Borrowing from financial institutions is, however, relatively 
costly for many early-stage issuers and small businesses as they may 
have low revenues, irregular cash-flow projections, insufficient assets 
to offer as collateral, and high external monitoring costs.\266\ Many 
startups and small businesses may find loan requirements imposed by 
financial institutions difficult to meet and may not be able to rely on 
these institutions to secure funding. For example, financial 
institutions generally require a borrower to provide collateral and/or 
a guarantee,\267\ which startups, small businesses and their owners may 
not be able to provide. Collateral may also be required for loans 
guaranteed by the SBA.
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    \266\ See Robb.
    \267\ Approximately 92% of all small business debt to financial 
institutions is secured, and owners of the firm guarantee about 52% 
of that debt. See Berger, A., and G. Udell, 1995, Relationship 
Lending and Lines of Credit in Small Firm Finance, Journal of 
Business 68(3), pp. 351-381. Some studies of small business lending 
also document the creation of local captive markets with higher 
borrowing costs for small, opaque firms as a result of strategic use 
of soft information by local lenders. See Agarwal, Sumit, and Robert 
Hauswald, 2010, Distance and Private Information in Lending, Review 
of Financial Studies 13(7), pp. 2757-2788.
---------------------------------------------------------------------------

    Other sources of debt financing for startups and small businesses 
include peer-to-peer and peer-to-business lending,\268\ 
microfinance,\269\ and other alternative online lending channels.\270\ 
According to some industry estimates, the global volume of ``lending-
based crowdfunding,'' which includes peer-to-peer lending to consumers 
and businesses, had risen to approximately $11.08 billion in 2014.\271\ 
Technology has facilitated the growth of alternative models of small 
business lending. According to one academic study,\272\ the outstanding 
portfolio balance of online alternative lenders has doubled every year, 
albeit this market represents less than $10 billion in outstanding loan 
capital. According to the 2014 Small Business Credit survey,\273\ 18% 
of all small businesses surveyed applied for credit with an online 
lender.\274\
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    \268\ Such debt transactions are facilitated by online platforms 
that connect borrowers and lenders and potentially offer small 
businesses additional flexibility with regard to pricing, repayment 
schedules, collateral or guarantee requirements, and other terms. 
See Ian Galloway, Peer-to-Peer Lending and Community Development 
Finance, Federal Reserve Bank of San Francisco (Working Paper) 
(2009), available at http://www.frbsf.org/publications/community/wpapers/2009/wp2009-06.pdf.
    \269\ See Craig Churchill and Cheryl Frankiewicz, Making 
Microfinance Work: Managing for Improved Performance, Geneva 
International Labor Organization (2006). Microfinance consists of 
small, working capital loans provided by microfinance institutions 
that are invested in microenterprises or income-generating 
activities. According to one report, in fiscal year 2012, the U.S. 
microfinance industry was estimated to have disbursed $292.1 million 
across 36,936 microloans, and was estimated to have $427.6 million 
in outstanding microloans (across 45,744 in microloans). See FIELD 
at the Aspen Institute, U.S. Microenterprise Census Highlights, FY 
2012, available at http://fieldus.org/Publications/CensusHighlightsFY2012.pdf.
    \270\ Several models of online small business lending have 
emerged: Online lenders raising capital from institutional investors 
and lending on their own account (for example, short-term loan 
products similar to a merchant cash advance); peer-to-peer 
platforms; and ``lender[hyphen]agnostic'' online marketplaces that 
facilitate small business borrower access to various loan products, 
from term loans and lines of credit to merchant cash advances and 
factoring products, from traditional and alternative lenders. See 
Karen Gordon Mills and Brayden McCarthy, The State of Small Business 
Lending: Credit Access during the Recovery and How Technology May 
Change the Game, Harvard Business School Working Paper 15-004 
(2014), available at http://ssrn.com/abstract=2470523 (``Mills-
McCarthy 2014).
    \271\ See Massolution, 2015CF Crowdfunding Industry Report: 
Market Trends, Composition and Crowdfunding Platforms, available at 
http://reports.crowdsourcing.org/index.php?route=product/product&product_id=54 (``Massolution 2015'') at 56. The Massolution 
2015 report refers to peer-to-peer lending to consumers and peer-to-
business lending to small businesses as ``lending based'' 
crowdfunding. Our discussion refers to peer-to-peer lending more 
broadly in a sense synonymous with ``lending-based'' crowdfunding.
    \272\ See Mills McCarthy 2014.
    \273\ The survey was conducted by the Federal Reserve Banks of 
New York, Atlanta, Cleveland, and Philadelphia between September and 
November of 2014. It focused on credit access among businesses with 
fewer than 500 employees in Alabama, Connecticut, Florida, Georgia, 
Louisiana, New Jersey, New York, Ohio, Pennsylvania, and Tennessee. 
The survey authors note that since the sample is not a random 
sample, results were reweighted for industry, age, size, and 
geography to reduce coverage bias. See Federal Reserve Banks of New 
York, Atlanta, Cleveland and Philadelphia, Joint Small Business 
Credit Survey Report (2014), available at http://www.newyorkfed.org/smallbusiness/SBCS-2014-Report.pdf.
    \274\ Id. The survey also showed differences in the use of 
online lenders by type of borrower: 22% of small businesses 
categorized in the survey as ``startups'' (i.e. businesses that have 
been in business for less than five years) applied for credit with 
online lenders. By comparison, 8% of small businesses categorized in 
the survey as ``growers'' (i.e. businesses that were profitable and 
experienced an increase in revenue) applied with online lenders, and 
3% of small businesses categorized in the survey as ``mature firms'' 
(i.e. businesses that have been in business for more than five 
years, had over ten employees, and had prior debt), applied with an 
online lender. The latter two categories of small businesses were 
more likely to apply for credit with bank lenders than with online 
lenders.
---------------------------------------------------------------------------

    Family and friends are also sources through which startups and 
small businesses can raise capital. This source of capital is usually 
available early in the lifecycle of a small business, before the 
business engages arm's-length, more formal funding channels.\275\ Among 
other things, family and friends may donate funds, loan funds or 
acquire an equity stake in the business. A recent study finds that most 
of the capital supplied to startups by friends and family is in the 
form of loans.\276\ Family and friends, however, may be able to provide 
only a limited amount of capital compared to other sources. We do not 
have data available on these financing sources that could allow us to 
quantify their magnitude and compare them to other current sources of 
capital.
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    \275\ See Paul Gompers and Josh Lerner, The Venture Capital 
Cycle (MIT Press 2006).
    \276\ See Robb at 1219.

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[[Page 69814]]

B. Analysis of Proposed Rules

1. Introduction
    In general, the proposed amendments to Rule 147 and Rule 504 are 
intended to expand the capital raising options available to startups 
and small businesses, including through the use of intrastate and 
regional securities offering provisions that have been enacted or could 
be enacted by various states, and thereby promote capital formation 
within the larger economy.
    Securities-based crowdfunding is a relatively new and evolving 
capital market which provides startups and small businesses an 
alternative mechanism of raising funds using the Internet, by selling 
small amounts of securities to a large number of investors. Title III 
of the JOBS Act directed the Commission to establish rules for an 
exemption that would facilitate this market at the federal level. 
Around the same time, some states began enacting intrastate 
crowdfunding statutes and rules that provide issuers with exemptions 
from state registration. Most state crowdfunding rules require issuers 
to comply with the requirements of Section 3(a)(11) and Rule 147, while 
one state currently provides issuers with the option of utilizing Rule 
504 or another Regulation D exemption.
    By modernizing the existing requirements under Rule 147, the 
proposed amendments would facilitate capital formation through 
intrastate crowdfunded offerings as well as through other state 
registered or state exempt offerings. By raising the offering amount 
limit under Rule 504 from $1 million to $5 million, the proposed 
amendments may facilitate offerings, including those registered or 
exempt in a state, or regional offerings made pursuant to the 
implementation of regional coordinated review programs.\277\ Such 
programs, when implemented, may enable Rule 504 issuers to register 
their offering in any one of the several states where they make the 
offering, instead of registering in all the states of solicitation, 
thereby saving time and money for issuers.
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    \277\ See http://www.nasaa.org/industry-resources/corporation-finance/coordinated-review/. See also the ``Reciprocal Crowdfunding 
Exemption'' proposed by the Massachusetts Securities Division 
available at http://www.sec.state.ma.us/sct/crowdfundingreg/Reciprocal%20Crowdfunding%20Exemption%20-%20MA.PDF.
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    As discussed below, the effects of the proposed amendments on 
capital formation would depend, first, on whether issuers that 
currently raise or plan to raise capital would choose to rely on 
securities offerings pursuant to amended Rules 147 and 504 in lieu of 
other methods of raising capital, such as Regulation Crowdfunding and 
Rule 506 of Regulation D. To assess the likely impact of the proposed 
amendments on capital formation, we consider the features of amended 
Rules 147 and 504 that potentially could increase the use of securities 
offerings by new issuers and by issuers that already rely on other 
private offering options.
    Second, to the extent that securities offerings under amended Rule 
147 and Rule 504 provide capital raising options for issuers that 
currently do not have access to capital, the proposed amendments could 
enhance the overall level of capital formation in the economy in 
addition to any reallocation of demand for capital amongst the various 
capital raising options that could arise from issuers changing their 
capital raising methods.
    Third, to the extent that states currently have residency and 
eligibility requirements in addition to prescriptive threshold 
requirements that correspond to existing Rule 147 provisions, the 
impact of the proposed amendments to Rule 147 on capital formation 
would significantly depend on whether states choose to modernize their 
provisions to align with the amended Rule 147. Any changes to the 
intrastate and regional securities offering provisions that may be 
enacted would, in turn, affect the expected use of amended Rule 504. 
For instance, while current intrastate crowdfunding provisions in most 
states require issuers to rely on Rule 147 for the federal exemption, 
to the extent the amended state provisions require the offerings to 
comply with either Rule 147 or Rule 504 in the future, the choice 
between reliance on these two exemptions could depend on issuers' 
preferences with respect to general solicitation, target investor base, 
and investor location. For example, while Rule 147 offerings would be 
restricted to in-state investors, Rule 504 offerings would be available 
to investors in more than one state, thus making regional offerings 
feasible. At the same time, there is no limit on the maximum offering 
amount under proposed Rule 147 for an offering that is registered with 
a state, while the proposed amendments under Rule 504 limit the maximum 
amount that can be sold over a twelve-month period to $5 million.\278\
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    \278\ While the proposed amendments to Rule 147 would limit the 
availability of the federal exemption to offerings of $5 million or 
less that are conducted pursuant to an exemption under state law, we 
believe the impact of this provision may not be significant given 
that existing crowdfunding state exemptions do not permit offerings 
greater than $4 million. States may have non-crowdfunding exemptions 
for larger offerings and issuers seeking to rely on any such state 
exemption could continue to conduct the offering pursuant to Section 
3(a)(11) or find an alternate federal exemption.
---------------------------------------------------------------------------

    Finally, the impact of the proposed amendments on aggregate capital 
formation also would depend on whether new investors are attracted to 
the Rule 147 and Rule 504 markets or whether investors reallocate 
existing capital among various types of offering options. For example, 
if the amended exemptions allow issuers to reach a category of 
potential investors significantly different from those that they can 
reach through other offering methods, capital formation, in aggregate, 
could increase. However, if the amended exemptions are viewed by 
investors as substantially similar to alternate exemptions, investors 
may simply reallocate their capital from other markets to the Rule 147 
or Rule 504 markets. Investor demand for securities offered under 
amended Rule 147 and Rule 504 could, in particular, depend on the 
extent to which expected risk, return and liquidity of the offered 
securities compare to what investors can obtain from securities in 
other exempt offerings and in registered offerings.
    Investor demand also would depend on whether state offering 
reporting requirements are sufficient to enable investors to evaluate 
the aforementioned characteristics of Rule 147 and Rule 504 offerings. 
For example, investors may be less willing to participate in intrastate 
crowdfunding or regional offerings that are made in reliance on 
exemptions from both state registration under state crowdfunding 
provisions and registration with the Commission under Rule 147 and Rule 
504 and that are subject to lower reporting requirements. 
Alternatively, the state registration requirement for using general 
solicitation in Rule 504 offerings, the proposed amendment to 
disqualify certain bad actors from participation in Rule 504 offerings, 
the maximum offering amount for state exempt offerings that rely on 
Rule 147, and the reporting requirements for larger intrastate 
crowdfunding offerings under state provisions may mitigate some of 
these investor protection concerns. For example, in a number of states, 
current intrastate crowdfunding provisions require issuers for 
offerings greater than $1 million to submit audited financial 
statements.\279\
---------------------------------------------------------------------------

    \279\ See NASAA's Intrastate Crowdfunding Resource Center at 
http://www.nasaa.org/industry-resources/corporation-finance/instrastate-crowdfunding-resource-center/, retrieved in June 2015.
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    The proposed amendments to Rule 147 and Rule 504 would remove or

[[Page 69815]]

reduce certain burdens identified by market observers.\280\ We believe 
that the potential use of amended Rule 147 and Rule 504 depends largely 
on how issuers perceive the trade-off between the costs of disclosure 
requirements, if any under state regulation, and the benefits of access 
to accredited and non-accredited investors. Some issuers may prefer to 
offer securities under amended Rule 147 or Rule 504 because of the 
potentially limiting features associated with other exemptions. For 
instance, relative to Regulation Crowdfunding, the use of amended Rule 
147 and Rule 504 in intrastate crowdfunding offerings would depend on 
whether the benefits of a larger offering size and fewer reporting 
requirements outweigh the costs of a more geographically limited 
investor base, compliance with issuer residency provisions under state 
crowdfunding laws and the potential for registration under Section 
12(g) of the Exchange Act. Compared to amended Rules 147 and 504, other 
exemptions could remain attractive to issuers. For example, securities 
sold pursuant to the exemptions from registration under Rule 506 of 
Regulation D, which account for a significant amount of exempt 
offerings,\281\ are subject to limits on participation by non-
accredited investors. In contrast, issuers relying on amended Rule 147 
or amended Rule 504 could sell securities to an unlimited number of 
non-accredited investors at the federal level, which would allow for a 
more diffuse investor base. General solicitation is currently permitted 
under Rule 506(c) of Regulation D, and issuers relying on Rule 506(c) 
can more easily reach institutional and accredited investors, making it 
less necessary for them to seek capital from a broader non-accredited 
investor base, especially if trading platforms aimed at accredited 
investors in privately placed securities continue to develop.\282\ In 
addition, offerings under Rule 506 that are limited only to accredited 
investors have no disclosure requirements, except for a notice filing. 
Finally, relative to the Regulation A exemption, amended Rules 147 and 
504 would have fewer disclosure and other regulatory requirements at 
the federal level. However, unlike Regulation A securities, which are 
freely resalable, Rule 147 and Rule 504 securities could be less liquid 
due to their resale restrictions.
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    \280\ See ABA Letter.
    \281\ See discussion in Section V.2 above.
    \282\ For example, ``NASDAQ Private Market's affiliated 
marketplace is an electronic network of Member Broker-Dealers who 
provide accredited institutions and individual clients with access 
to the market. Companies use a private portal to enable approved 
parties to access certain information and transact in its 
securities.'' See NASDAQ Private Market overview, available at: 
https://www.nasdaqprivatemarket.com/market/overview.
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    Overall, the proposed amendments to Rule 147 and Rule 504 could 
increase the aggregate amount of capital raised in the economy if used 
by issuers that have not previously conducted offerings using the 
provisions or other exemptions, or registered offerings. The impact of 
the proposed amendments on capital formation could also be 
redistributive in nature by encouraging issuers to shift from one to 
another capital raising method. This potential outcome may have a 
significant net positive effect on capital formation and allocative 
efficiency by providing issuers with access to capital at a lower cost 
than alternative capital raising methods and by providing investors 
with additional investment opportunities. The net effect also would 
depend on whether investors find the rules' disclosure requirements and 
investor protections to be sufficient to evaluate the expected return 
and risk of such offerings and to choose between offerings reliant on 
Rule 147, Rule 504 and other exempt offerings.
    As these proposed amendments are not currently in effect, the data 
does not exist to estimate the effect of the proposed rules on the 
potential rate of substitution between alternative methods of raising 
capital and the overall expansion (or decline, if any) in capital 
raising by potential issuers affected by the proposed amendments. 
However, we anticipate that the proposed amendments would result in an 
increased use of the Rule 147 exemption for intrastate offerings, 
including for intrastate crowdfunding as more states enact provisions 
facilitating such offerings. Similarly, we expect the proposed 
amendments would increase the use of the Rule 504 exemption, especially 
by facilitating efforts among state securities regulators to implement 
regional coordinated review programs that would enable regional 
offerings. Although it is not possible to predict the extent of such 
increase or the type and size of the issuers that would conduct 
intrastate crowdfunding offerings, the current number of businesses 
pursuing similar levels of financing through alternative capital 
raising methods, as discussed in the baseline section, provide an upper 
bound for Rule 147 and Rule 504 usage.\283\ Nevertheless, the baseline 
data show that the potential number of issuers that might seek to offer 
and sell securities in reliance on amended Rules 147 and 504 is large, 
particularly when compared to the current number of approximately 9,000 
reporting companies.\284\
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    \283\ We believe the numbers in the baseline provide an upper 
bound because unlike Rule 147 offerings, investors from multiple 
states are permitted to invest in Regulation D offerings, which 
attracts more issuers, especially those that want to raise larger 
amounts. Similarly, unlike Rule 504, Rule 506 provides state 
preemption and permits unlimited offer amounts, which appears to 
make Rule 506 offerings more attractive for issuers.
    \284\ See U.S. Securities and Exchange Commission, FY 2016 
Congressional Budget Justification, 2016 Annual Performance Plan, FY 
2014 Annual Performance Report, available at http://www.sec.gov/about/reports/secfy16congbudgjust.pdf.
---------------------------------------------------------------------------

    We recognize that the proposed amendments to Rules 147 and 504 
could raise investor protection concerns. For instance, as we discuss 
in detail further in this section, allowing Rule 147 issuers to have 
more dispersed assets and revenues could reduce oversight of issuers by 
in-state securities regulators. However, we believe such concerns are 
mitigated by the continuing applicability of state regulatory 
requirements that may impose additional eligibility conditions, as well 
as the residency requirements for investors and issuers under the 
amended rule provisions.\285\ As discussed above, in adopting Rules 147 
and 504, the Commission placed substantial reliance upon state 
securities laws and regulations on the rationale that the size and 
local nature of smaller offerings conducted pursuant to these 
exemptions does not warrant imposing extensive regulation at the 
federal level.\286\ State legislators and securities regulators could 
determine the specific additional rule requirements, if any, that 
should be required to regulate local offerings and provide additional 
investor protections.\287\ In this regard, the proposed amendments 
could provide greater flexibility to states in designing regulations 
that would work best for issuers and investors in their state. We 
believe that such latitude

[[Page 69816]]

could improve the efficiency of local capital markets and could lead to 
competition between states for attracting issuers to locate in their 
jurisdictions.
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    \285\ By requiring offerings to be sold only to residents of the 
state in which the issuer has its principal place of business, 
amended Rule 147 would help ensure that issuers and investors are 
sufficiently local in nature so as to allow effective oversight by 
state regulators. Further, most states require Rule 504 offerings to 
be registered under state securities laws, which enables states to 
regulate capital raising activity in this market.
    \286\ See Seed Capital Release, Executive Summary and Rule 147 
Adopting Release. See also discussion in Sections II.A and III.B 
above.
    \287\ According to the NASAA Enforcement Report for 2013, 
securities violations related to unregistered securities sold by 
unlicensed individuals, including fraudulent offerings marketed 
through the Internet, remain an important enforcement concern. The 
report does not detail the number and category of violations by type 
of exemption from registration. See NASAA Enforcement Report, 
available at: http://www.nasaa.org/wp-content/uploads/2011/08/2014-Enforcement-Report-on-2013-Data_110414.pdf.
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    In addition to state regulations, the proposed amendments that 
condition the availability of the amended Rule 147 exemption on states 
having an exemption that limits the maximum offering size and includes 
investment limits, and the proposed amendments to Rule 504 to 
disqualify certain bad actors from participation in Rule 504 offerings, 
could help to address such investor protection concerns. Finally, it 
should be noted that the Commission would retain authority under the 
antifraud provisions of the federal securities laws to pursue 
enforcement action against issuers and other persons involved in such 
offerings. Nevertheless, if investors demand higher returns because of 
a perceived increase in the risk of fraud as a result of less extensive 
federal regulation, issuers may face a higher cost of capital. We are 
unable to predict if or how the proposed amendments would affect the 
incidence of fraud in Rules 147 and 504 offerings.
    In the sections below, we analyze in more detail the potential 
costs and benefits stemming from the specific amendments proposed 
today, as well as their impact on efficiency, competition and capital 
formation, relative to the baseline discussed above.
2. Analysis of Proposed Amendments to Rule 147
    The proposed amendments to Rule 147 would facilitate intrastate 
offerings of securities by local companies, including offerings relying 
upon crowdfunding provisions under state securities laws. The proposed 
amendments seek to modernize Rule 147 to align with contemporary 
business practices, while retaining the underlying intrastate character 
of Rule 147 that permits local issuers to raise money from investors 
within their state without having to register the securities at the 
federal level.
a. Elimination of Limitation on Manner of Offering
    Currently, offers pursuant to Rule 147 must be limited to state 
residents only. The proposed amendments to Rule 147 would allow an 
issuer to make offers to out-of-state residents, as long as sales are 
made only to residents of the issuer's state or territory.\288\ In 
addition, the proposed amendments would require issuers to include 
disclosure on all offering materials stating that sales will be made 
only to residents of the same state or territory as the issuer, while 
also disclosing that the securities being sold are unregistered 
securities and have resale restrictions for a nine-month period.\289\
---------------------------------------------------------------------------

    \288\ See Proposed Rule 147(b).
    \289\ See Proposed Rule 147(f).
---------------------------------------------------------------------------

    The proposed amendments would enable Rule 147 issuers to engage in 
broad-based solicitations, including on publicly accessible Web sites, 
in order to successfully locate potential in-state investors. For 
example, for a New Jersey-based Rule 147 offering, issuers would be 
permitted under proposed Rule 147 to advertise and disseminate offering 
information through online media to reach New Jersey residents that 
work in New York, even though such information can be viewed by New 
York residents. This is not permitted under the current rule. Hence, 
the proposed amendments to Rule 147 would provide issuers with the 
flexibility to utilize a wider array of options to advertise their 
offerings, taking advantage of modern communication technologies such 
as the Internet and other social media platforms that allow investors 
inside and outside the issuer's state of residence to openly access 
offering information. In this regard, we expect the proposed amendments 
to be particularly effective at facilitating state-based crowdfunding 
offerings that rely heavily on online platforms to bring issuers and 
investors together.\290\
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    \290\ See Massolution 2015.
---------------------------------------------------------------------------

    The proposed amendments would thus make it easier for issuers to 
rely upon Rule 147 to conduct their offerings. Online advertising 
provides a cheaper and more efficient means of communicating with a 
more diffused base of prospective investors. Consequently, the 
elimination of offering limitations to residents should result in lower 
search costs for issuers. The amended provisions also may reduce 
issuers' uncertainty about compliance as they would not need to limit 
advertising or take additional precautions to ensure that only in-state 
residents could view the offering.
    The inclusion of legends on certificates or other documents 
evidencing the security and other mandatory disclosures in offering 
materials would inform investors, especially out-of-state investors, 
about the intrastate nature of the offering. At the same time, as a 
greater number of investors become aware of a larger and more diverse 
set of investment opportunities in private offerings, the proposed 
amendments may enable investors to diversify their investment portfolio 
and allocate their capital more efficiently. Further, such broadly 
advertised Rule 147 offerings would be able to more effectively compete 
for potential investors with Rule 504, Rule 506(c), and Regulation A 
offerings, where general solicitation is also permitted. The proposed 
amendments could thus heighten competition between unregistered capital 
markets, which may result in a more optimal flow of capital between 
investors and issuers, thereby enhancing the overall allocative 
efficiency of those markets.
    However, as issuers utilizing amended Rule 147 advertise more 
widely and freely, the likelihood of out-of-state investors purchasing 
into the offering could increase. The inclusion of legends and other 
mandatory disclosures may mitigate this concern and provide a certain 
measure of investor protection, although out-of-state investors in 
their desire to avail themselves of an attractive investment 
opportunity may overlook the legends or disclosures or may even 
disregard them. While issuers are required to have a reasonable belief 
that all their purchasers are resident within the state, the 
probability of violating the intrastate sale provisions could increase 
(relative to the baseline), at least in resale transactions that occur 
within the restrictive period for intrastate resales. Broader 
advertising of Rule 147 offerings could also impact the effectiveness 
of state oversight as regulators may not have adequate resources to 
track the conduct of such offerings on mass media.
b. Ease of Eligibility Requirements for Issuers
i. Incorporation and Residency Requirements
    The proposed amendments to Rule 147 would eliminate the requirement 
that issuers need to be incorporated in the state where the offering is 
conducted and would revise the current residency requirement to focus 
on the issuer's ``principal place of business'' rather than its 
``principal office.'' The former would be defined as the location from 
which officers, partners, or managers of the issuer primarily direct, 
control and coordinate the activities of the issuer.\291\
---------------------------------------------------------------------------

    \291\ Proposed Rule 147(c)(1). See also note 55 above.
---------------------------------------------------------------------------

    The proposed elimination of the requirement that the issuer be 
registered or incorporated in the state where the offering is being 
conducted would align the rule's provisions with modern business 
practices, thereby making it easier for a greater number of issuers to 
utilize the exemption. A significant number of companies are 
incorporated in states other than where their

[[Page 69817]]

principal place of business is located.\292\ Most of these companies 
have chosen to incorporate in places where corporate laws, including 
corporate tax laws, comport with modern business practices or are more 
permissive. For example, according to one academic study, corporate 
laws affect firm value, even after controlling for firm size, 
diversification, profitability, investment opportunities and 
industry.\293\ Thus, firms have strong incentives to select favorable 
local regimes such as Delaware.\294\ These studies and industry 
practices indicate that firms' choice of state of incorporation depends 
on the economic benefits derived from the regulatory environment in 
which the firm is organized, and as such the choice of legal home state 
may not be substantially related to where the business operations of 
the firms are located.
---------------------------------------------------------------------------

    \292\ Based on an analysis of data from Thomson Reuters' 
Compustat North America, approximately 74% of Exchange Act reporting 
companies indicated that, in 2014, they had separate state of 
location of headquarters and state of incorporation.
    \293\ Daines, Robert, ``Does Delaware Law Improve Firm Value?'' 
Journal of Financial Economics, Volume 62, Issue 3 (2001): 525-558.
    \294\ See Scott D. Dyreng, Bradley P. Lindsey, Jacob R. 
Thornock, ``Exploring the Role Delaware Plays as a Domestic Tax 
Haven,'' Journal of Financial Economics, Volume 108, Issue 3, 
(2013):751-772 (explaining that Delaware's tax laws play an 
economically important role in U.S. firms' decision to locate in 
Delaware).
---------------------------------------------------------------------------

    The practice of incorporating in certain states extends beyond 
public companies to private and smaller companies. As discussed in our 
baseline analysis above, data from Form D filings for the period 2009-
2014 indicates that a significant percentage of Rule 504 and Rule 505 
issuers were incorporated in Delaware and had separate states of 
incorporation and principal places of business.\295\ While smaller 
firms are less likely than larger firms to have separate states of 
incorporation and primary places of business, the Form D data described 
in the baseline indicates that a considerable number of small 
businesses are currently unable to meet the state of incorporation 
requirement in order to use the existing Rule 147 safe harbor. Since 
geography of investment and employment is aligned more closely with the 
principal place of business of a firm than with place of incorporation, 
replacing the current incorporation and residency tests with a 
principal place of business test would be consistent with the 
intrastate objective of Rule 147 and make it easier for more issuers to 
utilize the exemption.
---------------------------------------------------------------------------

    \295\ The data indicates that approximately 66% of all Rule 506 
offerings initiated during 2009-2014 reported different states of 
incorporation and operations.
---------------------------------------------------------------------------

    Eliminating the requirement to be incorporated in-state also would 
enable foreign incorporated issuers that have their principal place of 
business in a U.S. state to access the Rule 147 capital market. This 
would create a uniform basis for firms that are operating in similar 
local fashion, irrespective of their country or state of incorporation, 
to utilize the Rule 147 exemption. Form D filings for the period 2009-
2014 reported that approximately 3% of Regulation D offerings 
(approximately 3,000 offerings) were initiated by issuers that were 
incorporated outside of the United States and had their principal place 
of business in a U.S. state.
    We recognize the potential for issuers to switch their principal 
place of business to a different state in order to conduct Rule 147 
offerings in multiple states. To mitigate such concerns, the proposed 
amendments limit issuers that change their principal place of business 
from utilizing the exemption to conduct another intrastate offering in 
a different state for a period of nine months from the date of last 
sale of securities under the prior Rule 147 offering. This would be 
consistent with the duration of the resale limitation period during 
which sales to out-of-state residents are not permitted. As we discuss 
in detail below, such a provision should help to deter issuers from 
misusing the amended residency requirements to change their principal 
place of business in order to sell to residents in multiple states.
ii. ``Doing Business'' In-State Requirements
    The proposed amendments to Rule 147 would modify the current 
``doing business'' in-state tests for issuers by requiring them to have 
a principal place of business in-state and to satisfy one of four 
specified tests. The proposed amendments would include a new 
alternative test whereby issuers can qualify if a majority of their 
employees are located in the state. Consequently, under proposed Rule 
147, in order to be deemed ``doing business'' in a state, issuers would 
have to have a principal place of business in-state and satisfy at 
least one of the following requirements:
     80% of the issuer's consolidated assets are located within 
such state or territory;
     80% of the issuer's consolidated gross revenues are 
derived from the operation of a business or of real property located in 
or from the rendering of services within such state or territory;
     80% of the net proceeds from the offering are intended to 
be used by the issuer, and are in fact used, in connection with the 
operation of a business or of real property, the purchase of real 
property located in, or the rendering of services within such state or 
territory; or
     A majority of the issuer's employees are in such state or 
territory.
    The proposed modifications to the existing ``doing business'' in-
state tests would provide greater flexibility to potential Rule 147 
issuers and thereby ease their burden in complying with the exemption, 
while also better aligning the regulation with modern business 
practices. Issuers could use the test that best reflects the local 
nature of their business operations.
    As currently required, satisfying all the existing ``doing 
business'' in-state tests may be burdensome even for small businesses 
that are largely located in one state. For example, by restricting 
issuers' operations and capital investments substantially to one state, 
the existing requirement to qualify under all these tests may have 
adverse effects on the growth and survival of startups and early stage 
ventures that rely on the exemption.\296\ Moreover, in recent years new 
business models have emerged that may make satisfying all the 
eligibility tests ill-suited for relying on the Rule 147 exemption as a 
capital raising option. For example, businesses that use new 
technologies (e.g., e-businesses) to make their operations more 
efficient tend to be more geographically distributed in their 
operations or revenues than what is permitted under current Rule 147. 
According to an academic study, advances in computing and 
communications have fundamentally changed how information can be 
stored, distributed, modified or assimilated, which has enabled 
businesses to become more geographically dispersed and modular rather 
than centralized into discrete units.\297\ Similarly, the growth of 
modern technologies has made it easier for firms, through e-commerce 
and shared logistical networks, to reach a larger and more diffused 
customer base, leading to more dispersed revenue streams.
---------------------------------------------------------------------------

    \296\ For example, an e-commerce company may need to invest in 
distribution facilities outside their state to meet needs of 
customers who are more likely to be resident outside the state. 
Under current rule provisions, they may be able to invest only a 
small part (less than 20%) of the capital raised in a Rule 147 
offering outside their principal state of business.
    \297\ See Mohanbir Sawhney and Deval Parikh, ``Where Value Lives 
in A networked World,'' Harvard Business Review, 2001.

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[[Page 69818]]

    Requiring an issuer to own a majority of its assets in one state, 
invest most of the capital raised in one state, and obtain revenue 
mostly from in-state sales could create inefficient constraints for 
startups and small businesses to operate and grow. While the original 
intent of Section 3(a)(11) and Rule 147 was to ensure that investors 
and issuers are located in the same state so that they are potentially 
familiar with each other,\298\ current business practices of issuers, 
consumption habits of customers, and the set of available investment 
opportunities of investors have expanded greatly since Rule 147 was 
adopted in 1974. In view of these economic and social changes, we 
believe that the proposed principal place of business requirement and 
the modification to require an issuer to satisfy at least one 
additional test that demonstrates that that issuer does business in-
state would more effectively establish the local nature of an offering 
pursuant to Rule 147.
---------------------------------------------------------------------------

    \298\ See Rule 147 Adopting Release.
---------------------------------------------------------------------------

    The proposed amendments, by easing the eligibility and residency 
requirements for issuers, would enable a greater number of firms to use 
Rule 147 to raise capital. Such new issuers could be those entities 
that are currently accessing capital through an alternate private 
capital market, or they could be issuers that could not previously 
raise capital in any market but would be able to use amended Rule 147 
to meet their funding needs. In addition, to the extent raising capital 
in the Rule 147 market is cheaper than raising capital in alternate 
capital markets, issuers would benefit from such lower costs. Easier 
access to local capital would enable issuers to finance investment 
opportunities in a timely manner, thereby accelerating firm growth, 
which could consequently promote state employment and economic growth.
    As more firms become eligible or are willing to raise capital 
pursuant to amended Rule 147, the set of investment opportunities for 
investors would also increase in a corresponding manner, resulting in 
greater allocative efficiency and higher capital formation. To the 
extent the use of Rule 147 increases because of substitution out of 
other capital markets, the economy-wide increase in capital formation 
may not be significant while competition amongst private capital 
markets would be higher.\299\ To the extent that amended Rule 147 
attracts new issuers, capital formation levels would increase in the 
economy. We also believe that, by facilitating intrastate crowdfunding, 
amended Rule 147 would likely finance new firm growth and consequently 
would lead to an overall increase in capital formation. Further, 
amended Rule 147 could also lead to higher capital formation by 
facilitating offerings, including those with offer sizes greater than 
what is allowed for intrastate crowdfunding offerings, under other 
state exempted or state-registered offerings. However, since we do not 
have data on the existing use of Rule 147, we are unable to quantify or 
predict the extent of any increase in offering activity in non-
crowdfunding offerings under amended Rule 147.
---------------------------------------------------------------------------

    \299\ We note that issuers that meet current requirements under 
existing Rule 147 would also be eligible to rely on amended Rule 
147.
---------------------------------------------------------------------------

    At the same time, allowing issuers with a different state of 
incorporation to raise capital in another state under amended Rule 147 
could result in fewer incorporations for the state where the offering 
is being conducted, if this proposed amendment results in more issuers 
relocating to jurisdictions with perceived legal and tax advantages. 
Moreover, if issuers with widely-distributed assets and operations over 
more than one state make use of amended Rule 147, state oversight of 
such issuers could weaken, with a consequent decrease in investor 
protection. For example, if a majority or a significant proportion of 
an issuer's assets is located out-of-state, it could be more difficult 
for state regulators to assess whether any disclosures to investors 
about such assets are fair and accurate. However, state enforcement 
actions for protecting in-state investors can extend to issuers whose 
assets are located beyond the boundaries of the state, which could 
potentially deter issuers from engaging in fraudulent intrastate 
offerings. We also believe that qualifying under any one of the four 
``doing business'' in-state tests and requiring an issuer to have an 
in-state principal place of business, such that the officers and 
managers of the issuer primarily direct, control and coordinate the 
activities of the issuer in the state, would provide a state regulator 
with a sufficient basis from which to regulate an issuer's activities 
and enforce state securities laws for the protection of resident 
investors. In addition, if the proposed amendments to Rule 147 are 
adopted, state regulators may choose to amend their state regulations 
to comport with amended Rule 147, which would allow them to consider 
any additional requirements, including qualification tests, for issuers 
to comply with state securities offerings regulations.
    At the same time, even under the proposed amendment requiring 
issuers to qualify under one of the specified ``doing business'' in-
state tests, the high threshold levels specified in such tests may 
preclude certain issuers that use modern business models (e.g., some e-
commerce entities) from relying on the exemption, as such issuers could 
have widely distributed operations that may not allow them to qualify 
under any of the four tests.\300\
---------------------------------------------------------------------------

    \300\ Market participants, state regulators and other commenters 
have expressed similar concerns about the prescriptive threshold 
requirements for these tests. See note 11.
---------------------------------------------------------------------------

    Additionally, the proposed amendment to limit the ability of 
issuers for a period of nine months from the date of last sale of 
securities under a Rule 147 offering to conduct a new Rule 147 offering 
in a different state would discourage issuers from altering their 
principal place of business to raise capital through multiple state 
offerings. The duration of this proposed restriction is consistent with 
the period in which resales to out-of-state investors would not be 
permitted. In this regard, the proposed amendment could help mitigate 
some of the concerns relating to investor protection that may arise 
from the amended residency requirements. To the extent a change in 
principal place of business to a new state is motivated by business 
needs, this amendment could affect the capital raising prospects of 
firms by forcing them to delay their intrastate offerings. For example, 
certain start-ups and small businesses that could potentially change 
their principal place of business at lower costs could be affected by 
the proposed amendment. Issuers located in a greater metropolitan area 
(e.g., New Jersey and New York City) that spans multiple states also 
may be likely to consider switching their principal place of business 
to raise capital from residents of another state, and may be also 
impacted by the proposed amendment.
    We note that, under the integration provisions of current and 
proposed Rule 147, an issuer that conducts a Rule 147 offering in one 
state within six months of having offered or sold securities pursuant a 
Rule 147 offering in another state would have such offers and sales 
integrated for the purpose of compliance with the federal rule. In this 
respect, we believe that the proposed nine-month period during which an 
issuer would be prohibited from conducting an intrastate offering 
pursuant to the proposed rule after having completed sales of 
securities pursuant to the proposed rule in a different state would 
have the effect of extending by three months the six-month period of 
time during which

[[Page 69819]]

issuers cannot make sales in another state or territory.
c. Maximum Offering Amount and Investment Limitations for Offerings 
With Exemption From State Registration
    The proposed amendments would limit the availability of the 
exemption at the federal level to offerings that are either registered 
in the state in which all of the purchasers are resident or conducted 
pursuant to an exemption from state law registration in such state that 
limits the amount of securities an issuer may sell pursuant to such 
exemption to no more than $5 million in a twelve-month period and 
imposes an investment limitation on investors. These proposed limits 
would provide additional protections at the federal level and could 
mitigate investor protection concerns that may arise from the proposed 
modernization of Rule 147. Specifically, the proposed availability of 
amended Rule 147 to exempt offerings of up to $5 million in a twelve-
month period could provide greater investor protection by reducing the 
scale of fraudulent offerings, especially those that may be directed 
towards non-accredited investors and do not have significant state 
oversight. Similarly, the proposed limitation on the availability of 
the amended rule, as it relates to offerings that are exempt from state 
registration, to offerings that are conducted pursuant to a state law 
exemption that includes investment limitations could reduce the 
individual exposure of investors to potential fraud or loss of 
investment in a state-exempt offering pursuant to amended Rule 147.
    The proposed amendments would not alter existing state provisions 
that rely on, or the ability of states to adopt provisions that require 
issuers to comply with, Section 3(a)(11) and that may not impose a 
limitation on the maximum aggregate offering amount an issuer can raise 
or include investment limitations. As Rule 147 would no longer be a 
safe harbor for compliance with Section 3(a)(11), however, some states 
would need to update their existing provisions in order to effectively 
realize the benefits of the proposed amendments to Rule 147. These 
updates could be limited to removing existing references to Section 
3(a)(11) and/or adopting additional provisions that comport with the 
proposed rule. In the interest of expanding capital raising 
opportunities, some state regulations may be overly permissive, leading 
to a ``race-to-the-bottom'' that could ultimately impair investor 
protection. Given that state regulators have economic and reputational 
incentives to provide local issuers and investors with capital markets 
that are viable over the long run, it is unclear how significant this 
``race-to-the-bottom'' would be.
    Current intrastate crowdfunding provisions provide exemptions for 
offerings of less than $5 million and most of these state provisions 
have investment limits for non-accredited investors. For example, the 
highest maximum offering limit that any intrastate crowdfunding 
provisions currently permit is in Illinois, for crowdfunded offerings 
up to $4 million. As shown in the baseline, the median (average) 
offering size limit is $2 million ($1.6 million) in all the states that 
currently permit crowdfunding transactions. The impact of the proposed 
amendments on states regulatory flexibility is therefore moderated by 
the current absence of an intrastate crowdfunding exemption that 
permits offerings greater than $5 million. In addition, while the 
proposed amendment relating to investment limits only permits issuers 
to conduct their offerings pursuant to the proposed rule in states that 
have included investment limitations, it does not specify what such 
limitations should be.
    However, such limitations at the federal level could unduly 
restrict capital raising options of issuers, especially those issuers 
that sell primarily to accredited investors. A limit on the maximum 
offering amount could also restrict legitimate state interests in 
permitting larger offerings within their jurisdictions that otherwise 
rely on Rule 147 at the federal level. To the extent competition 
between states to enact securities laws to attract issuers to their 
territories results in better regulations that promote effective 
functioning of local financial markets, the proposed amendments would 
limit state regulators' opportunities to customize provisions that 
better suit the interests of issuers and investors in their state, 
rather than using a ``one-size fits all,'' or uniform, approach at the 
federal level that may work better for issuers and investors in some 
states than others.
3. Additional Amendments to Rule 147
    The proposed rules would include a number of additional amendments 
to Rule 147, including removing the requirement that an issuer obtain 
investor representations as to residency status and establishing a 
reasonable belief standard for determining whether a purchaser is a 
state resident at the time of the sale of the securities. This proposed 
amendment would be conceptually consistent with similar requirements in 
Regulation D offerings and would provide greater certainty to issuers 
as to their compliance with the conditions of the exemption, 
potentially encouraging greater reliance on the amended rule. In 
addition, providing a reasonable belief standard for ascertaining the 
in-state residency of investors would provide greater flexibility for 
Rule 147 issuers who currently are required to obtain a written 
representation from investors about their residency, and who are 
provided no relief under the rules for sales to persons that are not, 
in fact, in-state residents. This, in turn, could increase the number 
of issuers that rely on the amended Rule 147 exemption. At the same 
time, such provisions may result in issuers selling to investors who 
are not, in-fact, residents of the state, with a corresponding decline 
in investor protection. We believe this decline would be somewhat 
mitigated by any additional requirements that state securities laws may 
prescribe, as well as the reasonable belief standard and the mandatory 
disclosures and legends required under the proposed rule amendments.
    Moreover, the proposed rules would add a provision to define the 
residence of a purchaser that is a legal entity--such as a corporation, 
partnership, trust or other form of business organization--as the 
location where, at the time of the sale, the entity has its principal 
place of business. This definition would create consistency in defining 
the place of residence of entity investors with that of the issuer 
while also helping to ensure that investors are sufficiently local by 
nature. Such uniformity would also help to alleviate the rule's 
compliance burden by providing greater certainty.
    The proposed rule also would include a provision to amend the 
limitation on resales in Rule 147(e) to provide that resales can be 
made only to in-state residents during the nine-month period from the 
date of sale by the issuer. By amending the start date for the 
restricted period from ``date of last sale'' to ``date of sale'' for 
the particular security in question, investors will be able to sell 
before the entire offering is completed, while preserving the intent of 
restricting resales during a nine-month holding period to provide 
assurance that the securities have come to rest in-state before out-of-
state sales begin to occur. The amendment would thus provide greater 
liquidity for Rule 147 securities, making them more attractive to 
investors, which could lead to greater investor participation and an 
increase in the supply of capital available in the Rule 147 market. 
Further, it could improve price discovery and lead to lower capital 
raising costs for issuers.

[[Page 69820]]

    Additionally, the proposed approach not to condition the 
availability of the exemption on the issuer complying with provisions 
relating to resale restrictions would provide greater certainty to 
issuers. For example, issuers would not need to be concerned about 
potentially losing the exemption when the resale provisions are 
violated under circumstances that are beyond their control. At the same 
time, given that issuers would continue to be subject to other 
compliance conditions such as in-state sales limitations, mandatory 
offeree and purchaser disclosures, and stop transfer instructions, as 
well as federal antifraud and civil liability provisions, we believe, 
that this proposed amendment would not significantly increase risk of 
investor harm.
    The proposed amendment to Rule 147(f) to require disclosure 
regarding the limitations on resale to every offeree, in the manner in 
which the offering is communicated, would provide greater flexibility 
to issuers and ease compliance burdens in cases of oral offerings. 
Similarly, the proposed amendments to remove the requirement to 
disclose to offerees and purchasers the stop transfer instructions 
provided by an issuer to its transfer agent and the provisions of Rule 
147(f)(2) regarding the issuance of new certificates during the Rule 
147(e) resale period, would also ease compliance burdens for issuers. 
These changes together would lower the regulatory burden for issuers, 
especially smaller issuers, but may adversely impact the information 
provided to potential investors (offerees), who may not receive such 
information in writing, prior to making their investment decision. This 
impact is somewhat mitigated by the continuing requirement to provide 
the disclosure regarding resale restrictions, in writing, to every 
purchaser.
    Finally, the proposed rule would expand the current Rule 147 
integration safe harbor such that offers and sales pursuant to Rule 147 
would not be integrated with: (i) Any prior offers or sales of 
securities, (ii) any offers or sales made more than six months after 
the completion of the offering, or (iii) any subsequent offer or sale 
of securities that is either registered under the Securities Act, 
exempt from registration pursuant to Regulation A, Regulation S, Rule 
701, or Section 4(a)(6) or made pursuant to an employee benefit plan. 
The expansion of the integration safe harbor would provide issuers with 
greater certainty that they can engage in other exempt or register 
offerings either prior to or near in time with an intrastate offering 
without risk of becoming ineligible to rely on the Rule 147 exemption. 
Similarly, the addition of Section 4(a)(6) to the list of exempt 
offerings which will not be integrated with a Rule 147 offering would 
provide certainty to issuers that they can conduct concurrent 
crowdfunding offerings as per the provisions of the respective 
exemptions. This flexibility and ensuing certainty would be especially 
beneficial for small issuers who likely face greater challenges in 
relying on a single financing option for raising the desired amount of 
capital. However, such expansion of the integration safe harbor could 
result in fewer investor protections than if the offerings were 
integrated. The proposed rule, however, provides for non-integration 
only to the extent that the issuer meets the requirements of each of 
the other offering exemptions that are used to raise capital. 
Furthermore, requiring an issuer to wait at least 30 calendar days 
between its last offer made in reliance on Rule 147 and the filing of a 
registration statement with the Commission would provide additional 
protection to investors in registered offerings who might otherwise be 
influenced by an earlier intrastate offering. Therefore, we do not 
believe that the proposed adoption of the integration safe harbor would 
result in a significantly increased risk to investors.
4. Analysis of Proposed Amendments to Rule 504
    The proposed amendments to Rule 504 would raise the maximum 
aggregate amount that could be raised under a Rule 504 offering, in a 
12-month period, from $1 million to $5 million and would disqualify 
certain bad actors from participation in Rule 504 offerings. 
Additionally, in order to account for the proposed increased to the 
Rule 504 aggregate offering amount limitation, we propose technical 
amendments to the notes to Rule 504(b)(2) that would update the current 
illustrations in the rule regarding how the aggregate offering 
limitation is calculated in the event that an issuer sells securities 
pursuant to Rule 504 and Rule 505 within the same twelve-month 
period.\301\ All other provisions of current Rule 504 of Regulation D 
would remain unchanged.
---------------------------------------------------------------------------

    \301\ See Notes 1 and 2 to Rule 504(b)(2). [17 CFR 
230.504(b)(2)].
---------------------------------------------------------------------------

    As shown in our baseline analysis above, use of Rule 504 offerings 
has been declining over the past decade, in absolute terms as well as 
relative to Rule 506 of Regulation D. Relative to Rule 504 offerings, 
Rule 506 offerings have the advantage of preemption from state 
registration. Thus, even though Rule 506(b) offerings, unlike Rule 504 
offerings, are limited to accredited investors and up to only 35 non-
accredited investors, capital raising activity during the last two 
decades suggests that the benefits of state preemption outweigh 
unrestricted access to non-accredited investors. With the adoption of 
Rule 506(c), which allows for general solicitation, the comparative 
advantage of current Rule 504 has further diminished.
    The current $1 million maximum amount was set by the Commission in 
1988 and was meant to provide ``seed capital'' for small and emerging 
businesses.\302\ Given the costs of raising capital from public 
sources, the unregistered offerings market has expanded significantly 
in the past twenty-five years. The growth of angel investors and VCs, 
who invest primarily through unregistered offerings, has also increased 
seed capital available for investment at the initial stages of a firm. 
Angel investments in 2014 amounted to approximately $24 billion in 2014 
and the average angel deal size was approximately $328,500.\303\ 
According to PWC MoneyTree, in 2008, U.S. VCs made $1.5 billion of seed 
investments in 440 companies.\304\ That is an average seed investment 
of $3.5 million per company. While the involvement of VCs at the seed 
stage has been increasing over the years, it is reported that some 
angel deals at the seed stage have included investments as large as 
$2.5 million per entity.\305\ Given these changes, amending the Rule 
504 offer size from $1 million to $5 million would better comport 
regulation with market trends that indicate larger seed capital 
infusions.
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    \302\ See ``Seed Capital'' Release.
    \303\ According to a recent report, angel investments amounted 
to $24.1 billion in 2014, with approximately 73,400 entrepreneurial 
ventures receiving angel funding and approximately 316,600 active 
angel investors. Seed/startup stage deals accounted for 
approximately 25% of the $24 billion. See Jeffrey Sohl, The Investor 
Angel Market in 2014: A Market Correction in Deal Size, Center for 
Venture Research, May 14, 2015, available at https://paulcollege.unh.edu/sites/paulcollege.unh.edu/files/webform/2014%20Analysis%20Report.pdf.
    \304\ See PricewaterhouseCoopers, Investment by Stage of 
Development, available at: https://www.pwcmoneytree.com/CurrentQuarter/BySoD.
    \305\ See Fenwick & West Survey 2012 (March 2013), available at 
https://www.fenwick.com/publications/Pages/Seed-Finance-Survey-2012.aspx. The survey defines a ``seed'' financing as the first 
round of financing by a company in which the company raises between 
$250,000 and $2,500,000, and in which professional investors play a 
lead role.
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    Four parallel developments may further change the regulatory 
landscape

[[Page 69821]]

surrounding existing Rule 504. First, the use of current Rule 504 could 
be overshadowed by interstate crowdfunding offerings pursuant to 
Section 4(a)(6), which also allows issuers to raise up to $1 million 
over a 12-month period with unlimited access to non-accredited 
investors and unrestricted use of general solicitation, in addition to 
preemption from state regulation and exemption from the registration 
requirements under Section 12(g). Second, at least 29 states and the 
District of Columbia have enacted and several other states are in the 
process of enacting their own crowdfunding exemptions where the maximum 
amount that can be raised in a 12-month period ranges from $250,000 to 
$4 million, depending on the state (up to $2 million for all but three 
states). The maximum offering amounts for intrastate crowdfunding thus 
exceed the current offer limit under Rule 504. While most state 
crowdfunding exemptions require use of Rule 147, currently two states 
allow issuers to conduct their intrastate crowdfunding under the Rule 
504 exemption. Third, state regulators have been working to implement 
regional coordinated review programs in order to facilitate regional 
offerings that could potentially save issuers time and money. 
Additionally, at least one state is in the process of enacting 
reciprocal crowdfunding provisions, which may allow issuers to conduct 
interstate crowdfunding under state regulation.\306\ Since Rule 147 is 
restricted to intrastate offerings, Rule 504 would be the most likely 
federal exemption that could be used for such regional offerings. 
Fourth, Tier 1 of amended Regulation A, which became effective in June 
2015 and has a similar eligible issuer universe as Rule 504, allows 
offerings up to $20 million without any restrictions on resale of 
securities.
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    \306\ See http://www.nasaa.org/industry-resources/corporation-finance/coordinated-review/. See also, the `Reciprocal Crowdfunding 
Exemption' proposed by the Massachusetts Securities Division. http://www.sec.state.ma.us/sct/crowdfundingreg/Reciprocal%20Crowdfunding%20Exemption%20-%20MA.PDF.
---------------------------------------------------------------------------

    In light of these developments, the increase in the maximum amount 
that can be raised in Rule 504 offerings to $5 million could help make 
this market more attractive for startups and small businesses while 
also facilitating intrastate and regional offerings greater than $1 
million.
    A higher offering amount limit for Rule 504 offerings could 
increase the number of issuers that seek to utilize the exemption. To 
the extent that amended Rule 504 permits issuers to raise larger 
amounts of capital at lower costs than other unregistered capital 
markets, the proposed amendment could also lower issuer cost of capital 
and facilitate intrastate crowdfunding and the regional offerings 
market as it evolves. In addition to new issuers raising capital for 
the first time, it is likely that some issuers currently using other 
unregistered capital markets may switch to the amended Rule 504 market. 
Such movement would increase competition for supply of and demand for 
capital between the different unregistered markets, especially 
exemptions pursuant to amended Rule 147, Rule 506 of Regulation D, 
Regulation A, Regulation Crowdfunding, and other Section 4(a)(2) and 
Section 3(a)(11) exemptions. Further, modernizing our exemptive scheme 
in order to provide issuers, and especially small businesses, with more 
options for capital raising could foster an environment that encourages 
new market participants to enter the capital markets, thereby enhancing 
the overall level of capital formation in the economy.
    The proposed increase in the Rule 504 offering amount limit could 
also increase the number of investors, including non-accredited 
investors that can access a wider array of investment opportunities to 
diversify their investment portfolios with positive effects on the 
supply of capital and the allocative efficiency of unregistered capital 
markets. At the same time, increased access by non-accredited investors 
to Rule 504 offerings could raise investor protection concerns. 
Incidence of fraud could be higher under regional offerings relying on 
the Rule 504 exemption due to reduced oversight by states that may rely 
on reciprocal registration or coordinated review programs in the 
alternate state. The Commission's experience with the elimination of 
the prohibition against general solicitation for Rule 504 offerings in 
1992 \307\ and its subsequent reinstatement in 1999 as a result of 
heightened fraudulent activity \308\ illustrates the potential for 
fraud in the Rule 504 market. It should be noted, however, that in 1999 
we concluded that the increase in fraud occurred as a result of the 
prohibition on unrestricted general solicitation being removed and 
because securities issued under Rule 504 offerings were 
unrestricted.\309\ As a result, a non-reporting company could sell up 
to $1 million of unrestricted securities in a 12-month period and be 
subject only to the antifraud and civil liability provisions of the 
federal securities laws. In contrast, the proposed amendments would 
only increase the aggregate offering amount limitation of Rule 504, 
thereby leaving existing restrictions on general solicitation and the 
restricted securities status of the securities unchanged. State 
registration requirements may also mitigate the risk for investor abuse 
in Rule 504 offerings.
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    \307\ See Adoption of Small Business Initiatives, SEC Release 
No. 33-6949 (July 30, 1992).
    \308\ See Seed Capital Release.
    \309\ Id. As the Commission noted at the time it proposed to 
eliminate the unrestricted nature of securities issued under Rule 
504, securities issued in these Rule 504 offerings may have 
facilitated a number of fraudulent secondary transactions in the 
over-the-counter markets. The Commission also noted that these 
securities were issued by ``microcap'' companies, characterized by 
thin capitalization, low share prices and little or no analyst 
coverage. As the freely-tradable nature of the securities 
facilitated the fraudulent secondary transactions, we proposed to 
``implement the same resale restrictions on securities issued in a 
Rule 504 transaction as apply to transactions under the other 
Regulation D exemptions,'' in addition to reinstating the 
prohibition against general solicitation. Although we recognized 
that resale restrictions would have ``some impact upon small 
businesses trying to raise `seed capital' in bona fide 
transactions,'' we believed at the time that such restrictions were 
necessary so that ``unscrupulous stock promoters will be less likely 
to use Rule 504 as the source of the freely tradable securities they 
need to facilitate their fraudulent activities in the secondary 
markets.'' See Proposed Revision of Rule 504 of Regulation D, the 
``Seed Capital'' Exemption, No. 33-7541 (May 21, 1998) [63 FR 29168 
(May 28, 1998)], Executive Summary.
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    Recent enforcement cases involving Rule 504 offerings could also 
raise concerns regarding the potential for increased incidence of fraud 
under the proposed amendments. Most of these cases have involved 
promoters who engaged in secondary market sales of unrestricted 
securities that were previously issued in reliance on Rule 
504(b)(1)(iii), defrauding investors and in some cases unsophisticated 
issuers.\310\ Securities issued in reliance on Rule 504(b)(1)(iii) are 
exempt from state registration, and are permitted to use general 
solicitation. While the incidence of enforcement cases in this market 
has since declined, we recognize that an increase in the maximum 
offering size could increase the risk of investor harm, at least in 
offerings that are exempt from state registration.
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    \310\ See, e.g., SEC v. Stephen Czarnik, Case No. 10-cv-745 
(S.D.N.Y.), Litigation Release No. 21401 (Feb. 2, 2010); SEC v. 
Yossef Kahlon, a/k/a Jossef Kahlon and TJ Management Group, LLC, 
Case No. 4:12-cv-517 (E. D. Tex.) (Aug. 14, 2012).
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    Some of these investor concerns could be mitigated by the proposed 
amendments to Rule 504(b)(2) and the proposed amendment to extend bad 
actor disqualification provisions to Rule 504, consistent with other 
rules under Regulation D. As described above, the proposed amendment to 
Rule 504(b)(2) would update the current illustrations

[[Page 69822]]

of how the aggregate offering limitation is calculated in the event 
that an issuer sells securities pursuant to Rule 504 and Rule 505 
within the same twelve-month period. By enabling market participants to 
calculate more easily the amounts permitted to be sold, this amendment 
would provide greater clarity as to issuer compliance with the proposed 
increased aggregate offering limitation.
    The proposed amendments to Rule 504 would include bad actor 
disqualification provisions that are substantially similar to related 
provisions in Rule 506 of Regulation D.\311\ Consistent with Rule 
506(d), the proposed amendments would require that the covered person's 
status be assessed at the time of the first sale of securities. As in 
Rule 506(d), the proposed disqualification provisions would not 
preclude the participation of bad actors whose disqualifying events 
occurred prior to the effective date of the final amendments, which 
could expose investors to the risks that arise when bad actors are 
associated with an offering. However, issuers would be required to 
disclose disqualification events that occurred prior to the 
effectiveness of the proposed amendments. The risks to investors from 
participation of covered persons with prior disqualifying events may 
therefore be partly mitigated as investors would have access to 
relevant information that could inform their investment decisions. 
Disclosure of prior disqualifying events may make it more difficult for 
issuers to attract investors, and issuers may experience some or all of 
the impact of disqualification as a result. Some Rule 504 issuers may 
accordingly choose to exclude involvement by prior bad actors to avoid 
such disclosures.
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    \311\ See Rules 505(b)(2)(iii) and 506(d) of Regulation D, 17 
CFR 230,505(b)(2)(iii), 230.506(d).
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    We expect that the bad actor disqualification provisions could help 
reduce the potential for fraud in these types of offerings and thus 
strengthen investor protection. If disqualification standards lower the 
risk premium associated with the risk of fraud due to the presence of 
bad actors in securities offerings, they could also reduce the cost of 
capital for issuers that rely on the amended Rule 504 exemption. In 
addition, the requirement that issuers determine whether any covered 
persons are subject to disqualification might reduce the need for 
investors to conduct their own due diligence and could therefore 
increase efficiency. While fraud can still occur without prior 
incidence of disqualification on the part of the issuer or covered 
persons, these provisions could mitigate some of the concerns relating 
to incidence of fraud in offerings pursuant to amended Rule 504, 
including offerings pursuant to regional coordinated review programs, 
that could be registered in one jurisdiction but offered and sold in 
multiple jurisdictions.
    The disqualification provisions could also impose costs on issuers 
and covered persons. Issuers that are disqualified from using amended 
Rule 504 may experience an increased cost of capital or a reduced 
availability of capital, which could have negative effects on capital 
formation. In addition, issuers may incur costs related to seeking 
disqualification waivers from the Commission and replacing personnel or 
avoiding the participation of covered persons who are subject to 
disqualifying events. Issuers also might incur costs to restructure 
their share ownership to avoid beneficial ownership of 20% or more of 
the issuer's outstanding voting equity securities by individuals 
subject to disqualification.
    As discussed above, the proposed amendments would provide, by 
reference to Rule 506(d), a reasonable care exception as applicable for 
other exemptive rules under Regulation D. A reasonable care exception 
could facilitate capital formation by encouraging issuers to proceed 
with Rule 504 offerings in situations in which issuers otherwise might 
have been deterred from relying on Rule 504 if they risked potential 
liability under Section 5 of the Securities Act for unknown 
disqualifying events. At the same time, this exception also could 
increase the potential for fraud, by limiting issuers' incentives to 
determine whether bad actors are involved with their offerings. We also 
recognize that some issuers might incur costs associated with 
conducting and documenting their factual inquiry into possible 
disqualifications. The rule's flexibility with respect to the nature 
and extent of the factual inquiry required could allow an issuer to 
tailor its factual inquiry as appropriate to its particular 
circumstances, thereby potentially limiting costs. Finally, we note 
that extending the disqualification provisions to Rule 504 would create 
a more consistent regulatory regime under Regulation D that would 
simplify due diligence requirements and thereby benefit issuers and 
investors that participate in different types of exempt offerings.

C. Alternatives

1. Rescind Rule 505 Exemption
    As discussed in our baseline analysis above, over the past 20 
years, the use of the Rule 505 exemption has declined steadily and to a 
greater extent than the decline in the use of the Rule 504 exemption, 
in terms of the number of new offerings and amount of capital raised. 
During 2014, Rule 505 offerings raised less than 0.02% of capital 
raised in the Regulation D market, and approximately 2% of all capital 
raised by Regulation D offerings of less than $5 million, Rule 506 
which has state preemption clearly dominates the market due to the 
lower regulatory burden associated with this provision, relative to 
Rules 504 and 505.
    Further, we believe that by allowing offerings up to $5 million, 
amended Rule 504 would be preferable to existing Rule 505 for issuers 
currently eligible for both exemptions because it would provide access 
to an unlimited number of non-accredited investors and restricted 
general solicitation. Other unregistered markets may also provide a 
comparable market for potential Rule 505 issuers to raise the desired 
capital.\312\ Rescinding Rule 505 would therefore simplify the existing 
scheme of exemptive rules and regulations for unregistered offerings by 
making it easier for issuers and investors to choose between different 
capital markets.
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    \312\ For example, Rule 506(b) enables issuers to raise 
unlimited amounts along with providing preemption from state 
regulation; however, Rule 506(b) offerings are limited to 35 non-
accredited investors who must be sophisticated, either individually 
or through a purchaser representative. In contrast, while Regulation 
A offerings have greater disclosure requirements, they provide 
unlimited access to non-accredited investors with the added benefit 
of unrestricted resales of securities.
---------------------------------------------------------------------------

    To the extent that issuers are not able to switch to an alternate 
market or raise a sufficient amount of capital, however, rescinding 
Rule 505 could cause overall capital formation in the economy and 
allocative efficiency of capital markets to decline. For example, 
reporting companies and investment companies cannot utilize the Rule 
504 exemption. However, very few reporting companies (8 out of 289) or 
fund issuers (11) used the Rule 505 exemption during 2014,\313\ and 
these issuers can switch to a Rule 506 offering with little or no 
costs. We, therefore, believe that most Rule 505 issuers would likely 
be able to utilize other exemptions.
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    \313\ Based on an analysis of Form D filings. The numbers were 
similar during 2009-2013.
---------------------------------------------------------------------------

    The impact of repealing Rule 505 would also depend on investor

[[Page 69823]]

willingness and ability to switch from an investment in a Rule 505 
offering to an investment in an alternate unregistered capital market. 
Overall, we believe that repealing Rule 505 would not have a 
significant, or any, impact on capital formation because issuers would 
likely be successful at finding commensurate capital supply in an 
alternate unregistered capital market.
2. Lower Qualifying Thresholds under ``Doing Business'' In-State Tests
    An alternative to the proposed amendments relating to the four 
alternative criteria an issuer must satisfy in order to demonstrate it 
is doing business in-state could be to lower the percentage thresholds 
for the current or proposed 80% threshold requirements. For example, 
compared with the current 80% threshold requirements, requiring issuers 
to have the majority of their assets, derive the majority of their 
revenue, or use the majority of their offering proceeds in-state could 
better comport with modern business practices, provide greater 
flexibility and make it less burdensome for issuers to satisfy these 
requirements. Such a change would also align Rule 147 with other tests, 
including the proposed majority employees test, and also those tests 
that use a majority threshold for determining issuer status, for 
example for determining foreign private issuers.\314\
---------------------------------------------------------------------------

    \314\ See Securities Act Rule 405 and Exchange Act Rule 3b.
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    Lowering the prescriptive threshold requirements, while retaining 
the requirement to satisfy all or some of the criteria that provide 
indicia of in-state business, would help balance issuer compliance 
obligations with the need to align the locus of Rule 147 capital 
raising more closely with issuer operations. At the same time, if 
issuers with widely-distributed operations over more than one state are 
able to make greater use of amended Rule 147 under such lower 
thresholds, state oversight of such issuers could weaken, with a 
consequent decrease in investor protection. Some of these concerns 
could be mitigated by continuing to restrict sales to in-state 
residents and the inclusion of the principal place of business 
requirement, by the ability of states to extend their enforcement 
activities to issuers whose assets are located beyond state borders, 
and by the availability of federal authority to pursue enforcement 
action under the antifraud provisions of the federal securities laws.
3. Eliminate ``Doing Business'' In-State Tests
    As another alternative to the proposed rules we considered 
eliminating the proposed requirement to qualify under any of the 
``doing business'' tests. This alternative would significantly ease the 
burden for potential Rule 147 issuers in complying with the exemption, 
while also modernizing regulations to align with modern business 
practices. As described above, in recent years new business models have 
emerged that may make the eligibility tests ill-suited for relying on 
the Rule 147 exemption as a capital raising option. Requiring an issuer 
to own a significant proportion of its assets, have a majority of its 
employees in one state, invest most of the capital raised in one state, 
or derive revenue mostly from in-state sales could create inefficient 
constraints for startups and small businesses to operate and grow. In 
view of these broad changes in business practices, the principal place 
of business requirement may be sufficiently effective in establishing 
the local nature of an offering pursuant to Rule 147 for purposes of 
compliance with the ``doing business'' in-state requirement at the 
federal level. Relative to the proposed approach, this alternative 
approach would provide more flexibility to state regulators to enact 
their own eligibility and residency requirements that better suit the 
interests of issuers and investors in their state, rather than using a 
``one-size-fits all,'' or uniform, approach at the federal level that 
may work better for issuers and investors in some states than others.
    At the same time, under such alternative, as issuers with widely-
distributed assets and operations over more than one state make use of 
amended Rule 147, state oversight of such issuers could weaken, with a 
consequent decrease in investor protection. For example, if a majority 
or a significant proportion of an issuer's assets is located out-of-
state, it could be more difficult for state regulators to assess 
whether any disclosures to investors about such assets are fair and 
accurate. At the same time, state enforcement actions for protecting 
in-state investors can extend to issuers whose assets are located 
beyond the boundaries of the state. Additionally, under this 
alternative, the principal place of business requirement would replace 
the prescriptive ``doing business'' in-state requirements and could 
help mitigate investor protection concerns related to the local nature 
of the offering.
4. Decreasing or Increasing Rule 504 Maximum Offering Limit
    The offer limit under Rule 504 was last increased from $500,000 to 
$1 million in 1988. Adjusted for inflation, the $1 million in 1988 
would be worth approximately $2 million today.\315\ Additionally, 
offering amount limits under various state crowdfunding provisions 
generally are set around $2 million for most jurisdictions, with $4 
million being the highest offering limit in one state. As an 
alternative to the proposed rule, the offering limit under Rule 504 
could be raised to less than $5 million. Increasing the maximum Rule 
504 offering to an amount less than $5 million could help alleviate 
concerns about a decrease in investor protection from unlimited access 
to non-accredited investors. At the same time, this alternative would 
restrict capital raising options for issuers, especially if Rule 505 
(which permits offering amounts up to $5 million) is rescinded.
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    \315\ Annual inflation rates (1988-2014) based on consumer price 
index data, for all urban consumers, obtained from the Bureau of 
Labor Statistics.
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    Alternately, the maximum offering limit under amended Rule 504 
could be raised to an amount greater than $5 million. One example could 
be to align the maximum offering limit to that of the Tier I offer 
limit ($20 million) under amended Regulation A. This could allow for 
more cost-effective state registration, while also providing a 
competitive alternative to eligible issuers in Tier 1 of the Regulation 
A market. However, unlike the Regulation A market, non-accredited 
investors have no investment limits under the Rule 504 provisions. 
Moreover, recent enforcement cases have highlighted instances of 
investor abuse in offerings that are sold only to accredited investors 
in reliance on Rule 504(b)(1)(iii). A higher maximum offering amount 
would thus lead to greater investor protection concerns.
5. Additional Amendments to Rule 504
    In light of concerns about potential abuses involving securities 
issued in reliance on Rule 504(b)(1)(iii),\316\ imposing resale 
restrictions on such securities could increase investor protection by 
helping to ensure that securities initially sold pursuant to the 
exemption are only resold by initial purchasers after the passage of a 
fixed period of time. However, these restrictions would reduce the 
liquidity of Rule 504(b)(1)(iii) securities, which could increase the 
cost of capital for issuers seeking to raise capital in

[[Page 69824]]

reliance on this rule provision. At the same time, increasing investor 
protection through resale restrictions could attract greater investor 
interest and lower the expected risk premium, which would mitigate, to 
some extent, the higher costs arising from less liquid securities.
---------------------------------------------------------------------------

    \316\ See note 182 and related discussion in Section 0 and 
Section V.B.0 above.
---------------------------------------------------------------------------

    Additionally, Rule 504 could be amended to include additional 
disclosures to address investor protection concerns arising from the 
increase in the maximum offering size. While such disclosures could 
mitigate some of these concerns, they would increase the compliance 
burden for Rule 504 issuers and may also overlap or extend similar 
requirements under state law provisions in the jurisdiction in which 
such Rule 504 offering is registered.

D. Request for Comment

    We request comments regarding our analysis of the potential 
economic effects of the proposed amendments and other matters that may 
have an effect on the proposed rule. We request comment from the point 
of view of issuers, investors and other market participants. With 
regard to any comments, we note that such comments are of particular 
assistance to us if accompanied by supporting data and analysis of the 
issues addressed in those comments. For example, we are interested in 
receiving estimates and data on all aspects of the proposal and, in 
particular, on the expected size of the Rule 147 and Rule 504 markets 
(number of offerings, number of issuers, size of offerings, number of 
investors, etc., as well as information comparing these estimates to 
our baseline), overall economic impact of the proposed amendments, and 
any other aspect of this economic analysis. We also are interested in 
comments on the benefits and costs we have identified and any benefits 
and costs we may have overlooked as well as the impact of the proposed 
amendments on competition.
    66. What type (size, industry, age, etc.) and how many issuers have 
relied on Rule 147 during the years 2013 and 2014? In what states were 
these offerings conducted? How many of these were state-registered 
offerings? How many claimed an exemption from registration under state 
laws?
    67. What types of issuers (size, industry, age, etc.) would most 
likely rely on intrastate or regional offerings pursuant to amended 
Rules 147 and 504?
    68. As proposed, would amended Rules 147 and 504 attract startups 
and small businesses that are considering an offering pursuant to 
Regulation Crowdfunding? What types of issuers (size, industry, age, 
etc.) would prefer to conduct an intrastate crowdfunding offering to an 
interstate crowdfunding offering?
    69. How similar is a securities-based intrastate crowdfunding 
offering to a securities-based offering under Regulation Crowdfunding? 
How would the cost of an interstate crowdfunding offering compare with 
the cost of an intrastate crowdfunding offering? How would the expected 
incidence of success, failure, fraud and other outcomes of an 
interstate crowdfunding offering compare to the cost of an intrastate 
crowdfunding offering?
    70. Are issuers more likely to use the exemption under amended Rule 
147 or the exemption under amended Rule 504 for intrastate offerings if 
they have a choice under state regulation? Would the cost of raising 
capital be lower under amended Rule 147 or under amended Rule 504?
    71. As proposed, would the amended Rules 147 and 504 attract 
issuers that are considering offerings under Rule 506(b) or Rule 506(c) 
of Regulation D or Regulation A? What would the costs and benefits be 
from relying on the amended rules, compared to the costs and benefits 
from relying on Rule 506(b) or Rule 506(c) of Regulation D or 
Regulation A? Please provide estimates, where possible.
    72. What would be the economic effect of the proposed modification 
of the ``doing business'' in-state tests on Rule 147 offerings? What 
types of issuers and investors are most likely to be affected by the 
proposed amendments to the ``doing business'' tests?
    73. What would be the economic effect of the elimination of all 
``doing business'' in-state tests on Rule 147 offerings? What types of 
issuers and investors are most likely to be affected by the existing 
``doing business'' in-state requirements? Would the elimination of all 
``doing business'' in-state tests decrease investor protection? What 
would be the economic effect of retaining some or all of the tests with 
lower qualifying thresholds?
    74. What are the economic effects of requiring a maximum offering 
amount and investment limits for Rule 147 offerings that are exempt 
from state registration? Will issuers be likely to use Rule 147 if 
these proposed amendments relating to state-exempt offerings are 
adopted?
    75. How would amended Rule 147 affect other state registered and 
state exempt offerings? What type of issuers (size, age, industry, 
etc.) would rely on amended Rule 147 pursuant to state registration or 
a state exemption other than intrastate crowdfunding? What would be the 
typical offering sizes?
    76. Would the amended Rules 147 and 504 attract accredited and/or 
non-accredited investors to intrastate and regional offerings? How 
would the costs and benefits of the amended requirements compare to the 
costs and benefits of state preemption that currently exists for 
securities offered under Rule 506 of Regulation D? How would the costs 
and benefits compare to other exempt offering methods, such as 
Regulation A or Regulation Crowdfunding? Please provide estimates, 
where possible.
    77. Would the amended Rule 147 and 504 exemptions attract 
intermediaries (e.g., crowdfunding portals, broker-dealers or 
underwriters) to intrastate or regional offerings markets? How would 
the presence of intermediaries change the cost structure for Rule 147 
and Rule 504 issuers? Would the presence of intermediaries likely 
increase the chances that a wider variety of investors would 
participate in Rule 147 and 504 offerings?
    78. To what extent would additional resale restrictions on 
securities issued in reliance of Rule 504(b)(1)(iii) decrease the 
liquidity of such securities?
    79. How would a decrease in the Rule 504 offering amount limitation 
to, for example, $2.5 million in a 12-month period affect the use of 
Rule 504 exemption? Would it be sufficient to efficiently address 
capital raising needs of issuers and effectively address investor 
protection concerns? Would the costs of state registration be feasible 
under a smaller Rule 504 offering limitation?
    80. How would an increase in the Rule 504 offering amount 
limitation to, for example, $20 million in a 12-month period affect the 
use of Tier 1 of Regulation A? How would issuers benefit from the 
increased offering limitation? Would any such increase in the offering 
limitation have an adverse effect on investor protection?
    81. In the case of a repeal of Rule 505, which alternate exemption 
would Rule 505 issuers be most likely to utilize? How would the costs 
of capital for such issuers be affected?
    82. What would the cost be for an issuer that issues securities 
under state crowdfunding provisions and crosses the Section 12(g) 
thresholds for registering with the Commission? Please provide 
quantitative estimates, where available.
    83. What would be the economic impact of alternatives to the 
proposed rule amendments that have been discussed above?

[[Page 69825]]

VI. Paperwork Reduction Act

    The proposed amendments to Rule 147 do not contain a ``collection 
of information'' requirement within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\317\ Accordingly, the PRA is not 
applicable to the proposed amendments to Rule 147 and no PRA analysis 
is required.
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    \317\ 44 U.S.C. 3501 et seq. Although amended Rule 147(f) would 
require a legend on stock certificates and certain other disclosures 
to be made to offerees and purchasers, the proposed rule would 
prescribe the precise form of disclosure to be provided to the 
public, and thus the proposed amendments would not require issuers 
to obtain or compile information for purposes of compliance with 
this provision. See 5 CFR 1320.3(c)(2).
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    The proposed amendments to Rule 504 of Regulation D contain 
``collection of information'' requirements within the meaning of the 
PRA. There are two titles for the collection of information 
requirements contemplated by the proposed amendments. The first title 
is: ``Form D'' (OMB Control No. 3235-0076), an existing collection of 
information.\318\ The second title is: ``Regulation D Rule 504(b)(3) 
Felons and Other Bad Actors Disclosure Statement,'' a new collection of 
information. Although the proposed amendments to Rule 504 do not alter 
the information requirements set forth in Form D, the proposed 
amendments are expected to increase the number of new Form D filings 
made pursuant to Regulation D. Additionally, the mandatory bad actor 
disclosure provisions that would be required under proposed Rule 504 
would contain ``collection of information'' requirements within the 
meaning of the PRA. We are submitting the proposed amendments to the 
Office of Management and Budget (``OMB'') for review and approval in 
accordance with the PRA and its implementing regulations.\319\
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    \318\ Form D was adopted pursuant to Sections 2(a)(15), 3(b), 
4(a)(2), 19(a) and 19(c)(3) of the Securities Act (15 U.S.C. 
77b(a)(15), 77c(b), 77d(a)(2), 77s(a) and 77s(c)(3)).
    \319\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
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    The information collection requirements related to the filing of 
Form D with the Commission are mandatory to the extent that an issuer 
elects to make an offering of securities in reliance on the relevant 
exemption. Responses are not confidential, and there is no mandatory 
retention period for the information disclosed. The hours and costs 
associated with preparing and filing forms and retaining records 
constitute reporting and cost burdens imposed by the collection of 
information requirements. We are applying for an OMB control number for 
the proposed new collection of information in accordance with 44 U.S.C. 
3507(j) and 5 CFR 1320.13, and OMB has not yet assigned a control 
number to the new collection. Responses to the new collection of 
information would be mandatory. An agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
requirement unless it displays a currently valid OMB control number.

Form D (OMB Control No. 3235-0076)

    The Form D filing is required for issuers as a notice of sales 
without registration under the Securities Act based on a claim of 
exemption under Regulation D or Section 4(a)(5) of the Securities Act. 
The Form D must include basic information about the issuer, certain 
related persons, and the offering. This information is used by the 
Commission to observe use of the Regulation D exemptions and safe 
harbor.
    As we are not proposing to alter the information requirements of 
Form D, our proposed amendments will not affect the paperwork burden of 
the form, and the burden for responding to the collection of 
information in Form D will be the same as before the proposed 
amendments to Form D. However, we estimate that our proposed amendments 
to increase the aggregate amount of securities that may be offered and 
sold in any 12-month period in reliance on Rule 504 will increase the 
number of Form D filings that are made with the Commission.
    The table below shows the current total annual compliance burden, 
in hours and in costs, of the collection of information pursuant to 
Form D. For purposes of the PRA, we estimate that, over a three-year 
period, the average burden estimate will be four hours per Form D. Our 
burden estimate represents the average burden for all issuers. This 
burden is reflected as a one hour burden of preparation on the company 
and a cost of $1,200 per filing. In deriving these estimates, we assume 
that 25% of the burden of preparation is carried by the issuer 
internally and that 75% of the burden of preparation is carried by 
outside professionals retained by the issuer at an average cost of $400 
per hour. The portion of the burden carried by outside professionals is 
reflected as a cost, while the portion of the burden carried by the 
issuer internally is reflected in hours.

                                       Table 1--Estimated Paperwork Burden Under Form D, Pre-Amendment to Rule 504
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                            External
                                                       Number of      Burden hours/     Total burden   Internal issuer    professional     Professional
                                                       responses           form            hours             time             time            costs
                                                         (A) \320\              (B)                (C) = (A)*(B)  (D)              (E)   (F) = (E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form D............................................          25,300                4          101,200           25,300           75,900      $30,360,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For the year ended 2014, 19,717 issuers made 22,004 new Form D 
filings. The annual number of new Form D filings rose from 13,764 in 
2009 to 22,004 in 2014, an average increase of approximately 1,648 Form 
D filings per year, or approximately 10%. Assuming the number of Form D 
filings continues to increase by 1,648 filings per year for each of the 
next three years, the average number of Form D filings in each of the 
next three years would be approximately 25,300.
---------------------------------------------------------------------------

    \320\ Although the number of responses for Form D is reported as 
21,824 in the OMB's Inventory of Currently Approved Information 
Collections, available at http://www.reginfo.gov/public/do/PRAMain;jsessionid=D37174B5F6F9148DB767D63DF6983A65, we are 
preparing a new estimate based on the historical trend of the annual 
number of new Form D filings. Based on an average increase of 
approximately 1,648 new Form D filings per year over the past five 
years, we believe that the average number of new Form D filings in 
each of the next three years would be approximately 25,300.
---------------------------------------------------------------------------

    We estimate that the proposed amendments to Rule 504 would result 
in a much smaller annual increase in the number of new Form D filings 
than the average annual increase that has occurred over the past five 
years. To estimate how the proposed amendments to Rule 504 would impact 
the number of new Form D filings, we used as a reference point the 
impact of a past rule change on the market for Regulation D

[[Page 69826]]

offerings. In 1997, the Commission amended Rule 144(d) under the 
Securities Act \321\ to reduce the holding period for restricted 
securities from two years to one year,\322\ thereby increasing the 
attractiveness of Regulation D offerings to investors and to issuers. 
Prior to amending Rule 144(d), there were 10,341 Form D filings in 
1996, which was followed by a 20% increase in the number of Form D 
filings in each of the subsequent three calendar years, reaching 17,830 
by 1999. Although it is not possible to predict with any degree of 
certainty the increase in the number of Rule 504 offerings following 
the proposed amendments, we estimate for purposes of the PRA that there 
would be a similar 20% increase in the number of new Form D offerings 
that currently rely on either Rule 504 or 505.\323\ In 2014, there were 
544 new Form D filings reporting reliance on Rule 504 and 289 new Form 
D filings reporting reliance on Rule 505. We estimate that there will 
be an additional approximately 200 new Form D filings in each of the 
next three years attributable to the proposed amendments.\324\
---------------------------------------------------------------------------

    \321\ 17 CFR 230.144(d).
    \322\ See, SEC Rel. No. 33-7390 (Feb. 20, 1997) [62 FR 9242].
    \323\ We include the number of new Form D filings that rely on 
Rule 505 in these estimates since Rule 505 provides an alternative 
Regulation D exemption for an issuer to rely upon with a maximum 
offering limitation of no more than $5 million in a twelve month 
period.
    \324\ We estimate the number of new Form D filings attributable 
to the proposed amendments over the next three years as follows: 833 
new Form D filings in 2014 relying on either Rules 504 or 505, 
multiplied by 20% equals 166.6. Rounding 166.6 to the nearest 
hundredth provides us with an estimate of 200 new Form D filings 
attributable to the proposed amendments.
---------------------------------------------------------------------------

    Based on these increases, we estimate that the annual compliance 
burden of the collection of information requirements for issuers making 
Form D filings after amending Rule 504 to increase the aggregate 
offering amount from $1 million to $5 million would be an aggregate 
25,500 hours of issuer personnel time and $30,600,000 for the services 
of outside professionals per year.

                                      Table 2--Estimated Paperwork Burden Under Form D, Post-Amendment to Rule 504
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                            External
                                                       Number of      Burden hours/     Total burden   Internal issuer    professional     Professional
                                                       responses           form            hours             time             time            costs
                                                         (A) \325\              (B)                (C) = (A)*(B)  (D)              (E)   (F) = (E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form D............................................          25,500                4          102,000           25,500           76,500      $30,600,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

Regulation D Rule 504(b)(3) Felons and Other Bad Actors Disclosure 
Statement (a Proposed New Collection of Information)

    As proposed, the amendments to Rule 504 would disqualify issuers 
from reliance on Rule 504 if such issuer would be subject to 
disqualification under Rule 506(d) of Regulation D.\326\ Consistent 
with the requirements of Rule 506(e), we proposed to require that the 
issuer in a Rule 504 offering furnish to each purchaser, a reasonable 
time prior to sale, a written description of any matters that occurred 
before effectiveness of any amendments to the rule that may be adopted 
and within the time periods described in the list of disqualification 
events set forth in Rule 506(d)(1) of Regulation D,\327\ in regard to 
the issuer or any other ``covered person'' associated with the 
offering. For purposes of the mandatory disclosure provision described 
in the note to proposed Rule 504(b)(3),\328\ issuers would be required 
to ascertain whether any disclosures are required in respect of covered 
persons involved in their offerings, prepare any required disclosures 
and furnish them to purchasers.
---------------------------------------------------------------------------

    \325\ The information in this column is not based on the number 
of responses for Form D of 21,824, as reported in the OMB's 
Inventory of Currently Approved Information Collections, but rather 
on a new estimate of the average number of new Form D filings in 
each of the next three years. We prepared this estimate based on the 
historical trend of the annual number of new Form D filings. See 
text accompanying note 320 above. Based on an average increase of 
approximately 1,648 new Form D filings per year over the past five 
years, we estimate that the number of new Form D filings after the 
proposed amendment to Rule 504 would be the average number of new 
Form D filings we estimate in each of the next three years of 
25,300, plus the additional 200 filings we estimate would be filed 
as a result of the proposed amendment to Rule 504.
    \326\ See proposed Rule 504(b)(3); see also 17 CFR 230.506(d).
    \327\ 17 CFR 230.506(d)(1).
    \328\ See note to proposed Rule 504(b)(3).
---------------------------------------------------------------------------

    The Commission would adopt the proposed Regulation D Rule 504(b)(3) 
Felons and Other Bad Actors Disclosure Statement under the Securities 
Act. The Regulation D Rule 504(b)(3) Felons and Other Bad Actors 
Disclosure Statement that would be required to be furnished to 
investors does not involve submission of a form filed with the 
Commission and is not required to be presented in any particular 
format, although it must be in writing. The hours and costs associated 
with preparing and furnishing the Regulation D Rule 504(b)(3) Felons 
and Other Bad Actors Disclosure Statement to investors in the offering 
constitute reporting and cost burdens imposed by the collection of 
information. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid OMB control number.
    The disclosure or paperwork burden imposed on issuers appears in a 
note to proposed Rule 504(b)(3) and pertains to events that occurred 
before effectiveness of the final rules but which would have triggered 
disqualification had they occurred after effectiveness. Issuers relying 
on proposed Rule 504 would be required to furnish disclosure of any 
relevant past events that would have triggered disqualification under 
proposed Rule 504(b)(3) that relate to the issuer or any other covered 
person. If there are any such events, a disclosure statement would be 
required to be furnished, a reasonable time before sale, to all 
purchasers in the offering. The disclosure requirement would serve to 
protect purchasers by ensuring that they receive information regarding 
any covered persons that were subject to such disqualifying events.
    The disclosure requirement would not apply to triggering events 
occurring after the effective date of the proposed rule amendments, if 
adopted, because those events would result in disqualification from 
reliance on Rule 504 (absent a waiver or other exception provided in 
Rule 506(d)), rather than any disclosure obligation.
    The steps that issuers would take to comply with the proposed 
disclosure requirement are expected to mirror the steps they would take 
to determine whether they are disqualified from relying on Rule 504. We 
expect that issuers planning or conducting a Rule 504 offering would 
undertake a factual

[[Page 69827]]

inquiry to determine whether they are subject to any disqualification. 
Disqualification and mandatory disclosure would be triggered by the 
same types of events in respect of the same covered persons, with 
disqualification arising from triggering events occurring after the 
adoption and effectiveness of any amended rules and mandatory 
disclosure applicable to events occurring before that date. Therefore, 
we would expect that factual inquiry into potential disqualification 
could simply be extended to cover the period before any amended rules 
so adopted become effective. On that basis, we would expect that the 
factual inquiry process for the disclosure statement requirement would 
impose a limited incremental burden on issuers.
    We expect that the size of the issuer and the circumstances of the 
particular Rule 504 offering would determine the scope of the factual 
inquiry and require tailored and offering-specific data gathering 
approaches. We do not anticipate that it would generally be necessary 
for any issuer or any compensated solicitor to make inquiry of any 
covered individual with respect to ascertaining the existence of events 
that require disclosure more than once, because the proposed period to 
be covered by the inquiry would end with the effective date of any new 
disqualification rules (so future events would be unlikely to affect 
the inquiry or change the disclosures that would have to be made). We 
do, however, expect that issuers may be required to revise their 
factual inquiry for each Rule 504 offering due to changes in management 
or intermediaries, other changes to the group of covered persons or if 
questions arise about the accuracy of previous responses. We also would 
expect that the disclosure requirement may serve the additional 
function of helping issuers develop processes and procedures for the 
factual inquiry required to establish reasonable care under the 
disqualification provisions of Rule 506(d).
    We anticipate that the Regulation D Rule 504(b)(3) Felons and Other 
Bad Actors Disclosure Statement would result in an incremental increase 
in the burdens and costs for issuers that rely on the Rule 504 
exemption by requiring these issuers to conduct factual inquiries into 
the backgrounds of covered persons with regard to events that occurred 
before effectiveness of the final bad actor disqualification 
provisions. For purposes of the PRA, we estimate the total annual 
increase in paperwork burden for all affected Rule 504 issuers to 
comply with our proposed collection of information requirements would 
be approximately 830 hours of company personnel time and approximately 
$9,600 for the services of outside professionals. These estimates 
include the incremental time and cost of conducting a factual inquiry 
to determine whether the Rule 504 issuers have any covered persons with 
past disqualifying events. The estimates also include the cost of 
preparing a disclosure statement that issuers would be required to 
furnish to each purchaser a reasonable time prior to sale.
    In deriving our estimates, consistent with those assumptions used 
in the PRA analysis for the Rule 506 bad actor disqualification 
provisions,\329\ we assume that:
---------------------------------------------------------------------------

    \329\ See SEC Rel. No. 33-9414 (July 10, 2013).
---------------------------------------------------------------------------

    Approximately 750 Rule 504 issuers \330\ relying on Rule 504 of 
Regulation D would spend on average one additional hour to conduct a 
factual inquiry to determine whether any covered persons had a 
disqualifying event that occurred before the effective date of the rule 
amendments; and
---------------------------------------------------------------------------

    \330\ Filing data reviewed by the staff of the Commission's 
Division of Economic and Risk Analysis indicate that for 2014, 544 
issuers claimed Rule 504 and 289 issuers claimed Rule 505 in their 
Form D filings with the Commission. See Figure 1 in Section V.1 
above. For purposes of the PRA estimates, and based on the data 
provided for Rule 504 and Rule 505 offerings in 2014, we assume that 
approximately 750 issuers would file a Form D indicating reliance on 
Rule 504 after the effectiveness of any rule amendments proposed 
today. This figure includes issuers that, before the adoption of any 
potential amendments to Rule 504 proposed today, would have 
conducted offerings pursuant to Rule 505, but that after the 
adoption of any such amendments would likely conduct their offerings 
pursuant to Rule 504.
---------------------------------------------------------------------------

    On the basis of the factual inquiry, approximately eight issuers 
(or approximately 1%) would spend ten hours to prepare a disclosure 
statement describing matters that would have triggered disqualification 
under Rule 504(b)(3) of Regulation D had they occurred on or after the 
effective date of the rule amendments; and
    For purposes of the disclosure statement, approximately eight Rule 
504 issuers would retain outside professional firms to spend three 
hours on disclosure preparation at an average cost of $400 per hour.
    The increase in burdens and costs associated with conducting the 
proposed factual inquiry for the disclosure statement requirement 
should pose a minimal incremental effort given that issuers are 
simultaneously required to conduct a similar factual inquiry for 
purposes of determining disqualification from the Rule 506 exemption.
    It is difficult to provide any standardized estimates of the costs 
involved with the factual inquiry. There is no central repository that 
aggregates information from all federal and state courts and regulators 
that would be relevant in determining whether a covered person has a 
disqualifying event in his or her past. In this regard, we are 
currently unable to accurately estimate the burdens and costs for 
issuers in a verifiable way. We expect, however, that the costs to 
issuers may be higher or lower depending on the size of the issuer and 
the number and roles of covered persons. We realize there may be a wide 
range of issuer size, management structure, and offering participants 
involved in Rule 504 offerings and that different issuers may develop a 
variety of different factual inquiry procedures.
    Where the issuer or any covered person would be subject to an event 
covered by Rule 504(b)(3) that existed before the effective date of 
these rules, the issuer would be required to prepare disclosure for 
each relevant Rule 504 offering. The estimates include the time and the 
cost of data gathering systems, the time and cost of preparing and 
reviewing disclosure by in-house and outside counsel and executive 
officers, and the time and cost of delivering or furnishing documents 
and retaining records.
    Issuers conducting ongoing or continuous offerings would be 
required to update their factual inquiry and disclosure as necessary to 
address additional covered persons. The annual incremental paperwork 
burden, therefore, depends on an issuer's Rule 504 offering activity 
and the changes in covered persons from offering to offering. For 
example, some issuers may only conduct one Rule 504 offering during a 
year while other issuers may have multiple, separate Rule 504 offerings 
during the course of the same year involving different financial 
intermediaries, may hire new executive officers or may have new 20% 
shareholders, any of which would result in a different group of covered 
persons. In deriving our estimates, we recognize that the burdens would 
likely vary among individual companies based on a number of factors, 
including the size and complexity of their organizations. We believe 
that some companies would experience costs in excess of this estimated 
average and some companies may experience less than the estimated 
average costs.

Request for Comment

    We request comment on our approach and the accuracy of the current 
estimates. Pursuant to 44 U.S.C. 3506(c)(2)(A), the Commission solicits

[[Page 69828]]

comments to: (1) Evaluate whether the collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility; (2) 
evaluate the accuracy of the Commission's estimate of burden of the 
collection of information; (3) determine whether there are ways to 
enhance the quality, utility and clarity of the information to be 
collected; and (4) evaluate whether there are ways to minimize the 
burden of the collection of information on those who are required to 
respond, including through the use of automated collection techniques 
or other forms of information technology.
    Persons submitting comments on the collection of information 
requirements should direct the comments to the Office of Management and 
Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
DC 20503, and send a copy to Brent J. Fields, Secretary, Securities and 
Exchange Commission, 100 F Street NE., Washington, DC 20549-1090, with 
reference to File No. S7-22-15. Requests for materials submitted to OMB 
by the Commission with regard to these collections of information 
should be in writing, refer to File No. S7-22-15, and be submitted to 
the Securities and Exchange Commission, Office of FOIA Services, 100 F 
Street NE., Washington, DC 20549-1090. OMB is required to make a 
decision concerning the collection of information between 30 and 60 
days after publication of this release. Consequently, a comment to OMB 
is assured of having its full effect if OMB receives it within 30 days 
of publication.

VII. Initial Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (``RFA'') \331\ requires the 
Commission, in promulgating rules under Section 553 of the 
Administrative Procedure Act,\332\ to consider the impact of those 
rules on small entities. The Commission has prepared this Initial 
Regulatory Flexibility Analysis (``IRFA'') in accordance with Section 
603 of the RFA.\333\ This IRFA relates to the proposed amendments to 
Securities Act Rules 147 and 504.
---------------------------------------------------------------------------

    \331\ 5 U.S.C. 601 et seq.
    \332\ 5 U.S.C. 553.
    \333\ 5 U.S.C. 603.
---------------------------------------------------------------------------

A. Reasons for, and Objectives of, the Action

    The primary reason for, and objective of, the proposed amendments 
to Rule 147 is to establish a new Securities Act exemption for 
intrastate offerings of securities by local companies, including 
offerings relying upon newly adopted and proposed crowdfunding 
provisions under state securities laws. Market participants and state 
regulators have indicated that the combined effect of Section 
3(a)(11)'s statutory limitation on offers and the prescriptive issuer 
eligibility requirements of Rule 147 unduly restrict the availability 
of the exemption for local companies that would otherwise conduct 
intrastate offerings in a manner that is consistent with the original 
intent of Section 3(a)(11). These commenters have also indicated that 
the current requirements of Rule 147 make it difficult for issuers to 
take advantage of recently adopted state crowdfunding provisions. The 
proposed amendments to Rule 147 would ease these limitations in the 
rule and would allow an issuer to engage in any form of general 
solicitation or general advertising, including the use of publicly 
accessible Internet Web sites, to offer and sell its securities, so 
long as all purchasers of such securities are residents of the same 
state or territory in which the issuer's principal place of business is 
located. We propose to amend Rule 147 pursuant to our general exemptive 
authority under Section 28 of the Securities Act.
    The primary reason for, and objective of, the proposed amendments 
to Rule 504 is to facilitate capital formation by increasing the 
flexibility of state securities regulators to implement regional 
coordinated review programs that would facilitate regional offerings. 
The proposed amendments to Rule 504 would raise the aggregate amount of 
securities an issuer may offer and sell in any 12-month period from $1 
million to $5 million and disqualify certain bad actors from 
participating in Rule 504 offerings. We believe that raising the 
aggregate offering limitation and disqualifying certain bad actors 
would maximize the flexibility of state securities regulators to 
implement regional coordinated review programs and provide for greater 
consistency across Regulation D.

B. Legal Basis

    We are proposing the amendments pursuant to Sections 3(b)(1), 
4(a)(2), 19 and 28 of the Securities Act.

C. Small Entities Subject to the Proposed Amendments

    For purposes of the RFA, 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.\334\ For purposes of 
the Regulatory Flexibility Act, an investment company is a small entity 
if it, together with other investment companies in the same group of 
related investment companies, has net assets of $50 million or less as 
of the end of its most recent fiscal year.\335\
---------------------------------------------------------------------------

    \334\ 17 CFR 230.157.
    \335\ 17 CFR 270.0-10(a).
---------------------------------------------------------------------------

    While we lack data on the number and size of Rule 147 offerings 
\336\ or the type of issuers currently relying on the Rule 147 safe 
harbor, the nature of the eligibility requirements and other 
restrictions of the rule lead us to believe that it is currently being 
used by U.S. incorporated businesses that are likely small businesses 
seeking to raise small amounts of capital without incurring the costs 
of registering with the Commission.
---------------------------------------------------------------------------

    \336\ See note 211 above.
---------------------------------------------------------------------------

    Currently, issuers that intend to conduct intrastate crowdfunding 
offerings are required to use the Rule 147 exemption by most of the 
states that have enacted crowdfunding provisions. Since December 2011, 
when the first state enacted crowdfunding provisions, 106 state 
crowdfunding offerings have been reported to be filed with the 
respective state regulators.\337\ Of these offerings, 91 were reported 
to be approved or cleared, as of June 2015. We expect that almost all 
of the entities conducting these offerings were small issuers.
---------------------------------------------------------------------------

    \337\ Based on estimates provided by NASAA.
---------------------------------------------------------------------------

    The proposed amendments to Rule 504 would affect small issuers that 
rely on this exemption from Securities Act registration. All issuers 
that sell securities in reliance on Regulation D are required to file a 
Form D with the Commission reporting the transaction. For the year 
ended December 31, 2014, 19,717 issuers made 22,004 new Form D filings, 
of which 495 issuers relied on the Rule 504 exemption. Based on the 
information reported by issuers on Form D, there were 146 small issuers 
\338\

[[Page 69829]]

relying on the Rule 504 exemption in 2014. This number likely 
underestimates the actual number of small issuers relying on the Rule 
504 exemption, however, because 38% of issuers that are not pooled 
investment funds and 50% of issuers that are pooled investment funds 
declined to report on their Form D filed with the Commission their 
amount of revenues or assets.
---------------------------------------------------------------------------

    \338\ Of this number, 140 of these issuers are not pooled 
investment funds, and 6 are pooled investment funds. We also note 
that issuers that are not pooled investment funds disclose only 
revenues on Form D, and not total assets. Hence, we use the amount 
of revenues as a measure of issuer size for non-pooled investment 
funds and net asset value as a measure of issuer size for pooled 
investment funds.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    The proposed amendments to Rule 147 would not impose any reporting 
or recordkeeping requirements, but would require that issuers 
conducting offerings in reliance on the rule make certain specific 
disclosures to each offeree and purchaser in the offering. These 
disclosures would be made to each offeree in the manner in which any 
such offer is communicated and to each purchaser of a security in the 
offering in writing. The proposed amendments to Rule 147 would also 
require that issuers place a specific legend on the certificate or 
other document evidencing the securities that are being offered in 
reliance on the rule.
    In order to comply with proposed Rule 147(d), issuers would need to 
have a reasonable belief that a prospective purchaser resides within 
the state or territory of which the issuer has its principal place of 
business. The steps required to establish reasonable belief would vary 
with the circumstances. For example, an issuer may need to consider 
facts and circumstances, such as the existence of a pre-existing 
relationship between the issuer and the prospective purchaser providing 
the issuer with insight and knowledge as to the primary residence of 
the prospective purchaser. An issuer may also consider other facts and 
circumstances establishing the residency of a prospective purchaser, 
such as evidence of the home address of the prospective purchaser, as 
documented by a recently dated utility bill, pay-stub, information 
contained in a state or federal tax returns, or any state-issued 
documentation, such as a driver's license or identification card.
    The proposed amendments to Rule 504 would increase the aggregate 
offering ceiling from $1 million to $5 million and disqualify certain 
bad actors from participating in Rule 504 offerings. Issuers would need 
to comply with all the current requirements of Rule 504, including the 
filing of a Form D.\339\ Also, as it is the case under current Rule 
504, issuers relying on the rule that wish to engage in general 
solicitation and issue freely tradable securities may also be required 
to register their offering with at least one state regulator. The 
proposed amendments to Rule 504 would also impose a disclosure 
requirement with respect to bad actor disqualifying events that 
occurred before the effective date of any of the proposed 
disqualification provisions, if adopted, and would have triggered 
disqualification had they occurred after that date.\340\ Such 
disclosure would be required to be in writing and furnished to each 
purchaser a reasonable time prior to sale. There would be no prescribed 
form that such disclosure must take.
---------------------------------------------------------------------------

    \339\ Rule 503 requires an issuer relying on any exemption under 
Regulation D to file a Form D within 15 calendar days after the 
first sale of securities in the offering.
    \340\ See proposed Rule 504(b)(3).
---------------------------------------------------------------------------

    In addition, we would expect that issuers would exercise reasonable 
care to ascertain whether a disqualification exists with respect to any 
covered person, and document their exercise of reasonable care. The 
steps required would vary with the circumstances, but we anticipate 
would generally include making factual inquiry of covered persons and, 
where the issuer has reason to question the veracity or completeness of 
responses to such inquiries, further steps such as reviewing 
information on publicly available databases. In addition, issuers would 
have to prepare any necessary disclosure regarding preexisting events. 
We would expect that the costs of compliance would vary depending on 
the size and nature of the offering but that they would generally be 
lower for small entities than for larger ones because of the relative 
simplicity of their organizational structures and securities offerings 
and the generally smaller numbers of individuals and entities involved.

E. Overlapping or Conflicting Federal Rules

    We believe that there are no federal rules that conflict with the 
proposed amendments to Rule 147 and Rule 504 of Regulation D. As 
discussed above,\341\ Rule 147, as proposed to be amended, would 
encompass offerings that are exempt under Securities Act Section 
3(a)(11). Amended Rule 147, however, also would extend to certain other 
offerings that do not meet the requirements for the statutory 
exemption, such as those offered on publicly accessible Internet Web 
sites. As discussed above,\342\ Rule 504, as proposed to be amended, 
would have the same offering limitation as current Rule 505 and include 
bad actor disqualification provisions, which would reduce the 
distinctions between these rules across Regulation D if the amendments 
to the rules are adopted as proposed.
---------------------------------------------------------------------------

    \341\ See discussion in Section II.B above.
    \342\ See discussion in Section III.C above.
---------------------------------------------------------------------------

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant 
alternatives that would accomplish the stated objectives of our 
amendments, while minimizing any significant adverse impact on small 
entities. Specifically, we considered the following alternatives: (1) 
Establishing different compliance or reporting requirements or 
timetables that take into account the resources available to small 
entities; (2) clarifying, consolidating or simplifying compliance and 
reporting requirements for small entities under the rule; (3) using 
performance rather than design standards; and (4) exempting small 
entities from coverage of all or part of the proposed amendments.
    With respect to clarification, consolidation and simplification of 
the rule's compliance and reporting requirements for small entities, 
the proposed amendments to Rule 147 do not impose any new reporting 
requirements. To the extent the proposed amendments may be considered 
to create a new compliance requirement to have a reasonable belief that 
a prospective purchaser is a resident of the state or territory in 
which the issuer has its principal place of business, the precise steps 
necessary to meet that requirement will vary according to the 
circumstances, and this flexible standard will be applicable to all 
issuers, regardless of size. We believe our proposals are designed to 
streamline and modernize the rule for all issuers, both large and 
small. Nevertheless, we request comment on ways to clarify, 
consolidate, or simplify any part of the proposed amendments to Rule 
147, including whether we should retain the current safe harbor under 
Rule 147.
    In connection with our proposed amendments to Rule 147, we do not 
think it feasible or appropriate to establish different compliance or 
reporting requirements or timetables for small entities. The proposed 
amendments are designed to facilitate access to capital for both large 
and small issuers, but particularly smaller issuers who may satisfy 
their financing needs by limiting the sales of their securities only to 
residents of the state or territory

[[Page 69830]]

in which they have their principal place of business. The proposed 
amendments do not contain any reporting standards and the compliance 
requirements it does include are minimal and designed with the limited 
resources of smaller issuers in mind. For example, the proposed rule 
would eliminate the current requirement to obtain an investor 
representation as to residency status because we do not believe such a 
requirement would be necessary in all circumstances. Similarly, we do 
not believe it is necessary to clarify, consolidate or simplify 
reporting or compliance requirements for small entities as the proposed 
rule contains more streamlined requirements for all issuers, both large 
and small. For example, the proposed amendments simplify the doing 
business in-state determination by amending the current rule 
requirements so that an issuer's ability to rely on the rule would be 
based on the location of the issuer's principal place of business and 
its ability to satisfy an additional criterion that we believe would 
provide further assurance of the in-state nature of the issuer's 
business within the state in which the offering takes place. With 
respect to using performance rather than design standards, we note that 
our proposed amendment establishing a ``reasonable belief'' standard 
for the determination of a prospective purchaser's residency status is 
a performance standard. Rather than prescribe specific steps necessary 
to meet such a standard, such as requiring written representations from 
investors, the proposed rules recognize that reasonable belief can be 
established in a variety of ways (e.g., through pre-existing knowledge 
of the purchaser, obtaining supporting documentation, or using other 
appropriate methods). We believe that the use of a performance standard 
accommodates different types of offerings and purchasers without 
imposing overly burdensome methods that may be ill-suited or 
unnecessary to a particular offering or purchaser, given the facts and 
circumstances.
    With respect to exempting small entities from coverage of the 
proposed amendments to Rule 147, we believe such changes would be 
impracticable. These proposed amendments are designed to facilitate an 
issuer's access to capital, regardless of the size of the issuer. We 
have endeavored throughout these proposed amendments to minimize the 
regulatory burden on all issuers, including small entities, while 
meeting our regulatory objectives. We believe exempting small entities 
from our proposals would increase, rather than decrease, their 
regulatory burden. Nevertheless, we request comment on ways in which we 
could exempt small entities from coverage of any unduly onerous aspects 
of our proposed amendments.
    In connection with our proposed amendments to Rule 504 of 
Regulation D, we do not think it is feasible or appropriate to 
establish different compliance or reporting requirements or timetables 
for small entities. Our proposals are intended to facilitate issuers' 
access to capital and are particularly designed for smaller issuers who 
are not subject to the reporting requirements of Section 13 or 15(d) of 
the Exchange Act and who are offering no more than $5 million of their 
securities in any twelve month period. The proposed amendments are also 
designed to exclude ``felons and other `bad actors' '' from involvement 
in Rule 504 securities offerings, which we believe could benefit small 
issuers by protecting them and their investors from bad actors and 
increasing investor trust in such offerings. Increased investor trust 
could potentially reduce the cost of capital and create greater 
opportunities for small businesses to raise capital. Exempting small 
entities from our proposals would increase, rather than decrease, their 
regulatory burden. Nevertheless, we request comment on whether it is 
feasible or appropriate for small entities to have different 
requirements or timetables for compliance with our proposals.
    With respect to clarification, consolidation and simplification of 
the compliance and reporting requirements for small entities, the 
proposed amendments do not impose any new reporting requirements. To 
the extent the proposed amendments may be considered to create a new 
compliance requirement to exercise reasonable care to ascertain whether 
a disqualification exists with respect to any offering and to furnish a 
written description of preexisting triggering events, the precise steps 
necessary to meet that proposed requirement would vary according to the 
circumstances. In general, we believe the requirement would more easily 
be met by small entities than by larger ones because we believe that 
their structures and securities offerings would be generally less 
complex and involve fewer participants. Nevertheless, we request 
comment on ways to clarify, consolidate, or simplify any part of our 
proposed rule amendments for small entities.
    With respect to the use of performance or design standards, we note 
that our proposed amendments to Rule 504 relating to increasing the 
aggregate offering amount that may be offered and sold in any 12-month 
period from $1 million to $5 million would use design rather than 
performance standards. We note, however, that the ``reasonable care'' 
exception would be a performance standard. With respect to exempting 
small entities from coverage of these proposed amendments, we believe 
that such an approach would be impracticable. Regulation D was 
designed, in part, to provide exemptive relief for smaller issuers. 
Exempting small entities from bad actor provisions could result in a 
decrease in investor protection and trust in the private placement and 
small offerings markets. We have endeavored to minimize the regulatory 
burden on all issuers, including small entities, while meeting our 
regulatory objectives, and have proposed to include a ``reasonable 
care'' exception and waiver authority for the Commission to give 
issuers and other covered persons additional flexibility with respect 
to the application of these amendments.

G. General Request for Comment

    We encourage comments with respect to any aspect of this initial 
regulatory flexibility analysis. In particular, we request comments 
regarding:
     The number of small entities that may be affected by the 
proposals;
     The existence or nature of the potential impact of the 
proposals on small entities discussed in the analysis; and
     How to quantify the impact of the proposed amendments.
    Commenters are asked to describe the nature of any impact and 
provide empirical data supporting the extent of the impact. Such 
comments will be considered in the preparation of the Final Regulatory 
Flexibility Analysis, if the proposals are adopted, and will be placed 
in the same public file as comments on the proposed amendments 
themselves.

VIII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\343\ the Commission must advise the OMB as to 
whether a proposed regulation constitutes a ``major'' rule. Under 
SBREFA, a rule is considered ``major'' where, if adopted, it results or 
is likely to result in:
---------------------------------------------------------------------------

    \343\ Pub. L. 104-121, Tit. II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);

[[Page 69831]]

     a major increase in costs or prices for consumers or 
individual industries; or
     significant adverse effects on competition, investment or 
innovation.
    If a rule is ``major,'' its effectiveness will generally be delayed 
for 60 days pending Congressional review.
    We request comment on whether our proposed amendments would be a 
``major rule'' for purposes of SBREFA. We solicit comment and empirical 
data on:
     The potential effect on the U.S. economy on an annual 
basis;
     any potential increase in costs or prices for consumers or 
individual industries; and
     any potential effect on competition, investment or 
innovation.
    We request those submitting comments to provide empirical data and 
other factual support for their views to the extent possible.

IX. Statutory Basis and Text of Proposed Rules

    The amendments contained in this release are being proposed under 
the authority set forth in Sections 3(b)(1), 4(a)(2), 19 and 28 of the 
Securities Act of 1933, as amended.

Text of Proposed Amendments

List of Subjects in 17 CFR Part 230

    Reporting and recordkeeping requirements, Securities.

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
1. The authority citation for part 230 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126 
Stat. 313 (2012), unless otherwise noted.
* * * * *
0
2. Section 230.147 is revised to read as follows:


Sec.  230.147  Intrastate sales exemption.

    (a) Scope of the exemption. Offers and sales by or on behalf of an 
issuer of its securities made in accordance with all of the provisions 
of this section (Sec.  230.147) are exempt from section 5 of the Act 
(15 U.S.C. 77e) if the issuer:
    (1) Registers the offer and sale of such securities in the state in 
which all purchasers of the securities are resident; or
    (2) Conducts the offer and sale of such securities pursuant to an 
exemption from registration in the state in which all purchasers of the 
securities are resident that limits the amount of securities:
    (i) An issuer may sell pursuant to such exemption to no more than 
$5 million in a twelve-month period; and
    (ii) An investor may purchase in such offering (as determined by 
the appropriate authority in such state).
    (b) Manner of offers and sales. An issuer, or any person acting on 
behalf of the issuer, may rely on this exemption to make offers and 
sales using any form of general solicitation and general advertising, 
so long as the issuer complies with the provisions of paragraphs (c), 
(d), and (f) through (h) of this section.
    (c) Nature of the issuer. The issuer of the securities shall at the 
time of any offers and sales pursuant to this section:
    (1) Have its principal place of business within the state or 
territory in which all purchasers of the securities are resident. The 
issuer shall be deemed to have its principal place of business in a 
state or territory in which the officers, partners or managers of the 
issuer primarily direct, control and coordinate the activities of the 
issuer; and
    (2) Meet at least one of the following requirements:
    (i) The issuer derived at least 80% of its consolidated gross 
revenues from the operation of a business or of real property located 
in or from the rendering of services within such state or territory;
    (ii) The issuer had at the end of its most recent semi-annual 
fiscal period prior to an initial offer of securities in any offering 
or subsequent offering pursuant to this section, at least 80% of its 
assets and those of its subsidiaries on a consolidated basis located 
within such state or territory;
    (iii) The issuer intends to use and uses at least 80% of the net 
proceeds to the issuer from sales made pursuant to this section (Sec.  
230.147) in connection with the operation of a business or of real 
property, the purchase of real property located in, or the rendering of 
services within such state or territory; or
    (iv) A majority of the issuer's employees are based in such state 
or territory.

    Note 1 to paragraph (c)(1). An issuer that has previously 
conducted an intrastate offering pursuant to this section (Sec.  
230.147) may not conduct another intrastate offering pursuant to 
this section (Sec.  230.147), based upon satisfaction of the 
principal place of business definition contained in paragraph (c)(1) 
of this section (Sec.  230.147(c)(1)) in a different state or 
territory, until the expiration of the time period specified in 
paragraph (e) of this section (Sec.  230.147(e)), calculated on the 
basis of the date of the last sale in such offering.


    Note 1 to paragraph (c)(2)(i). Revenues must be calculated based 
on the issuer's most recent fiscal year, if the first offer of 
securities pursuant to this section is made during the first six 
months of the issuer's current fiscal year, and based on the first 
six months of the issuer's current fiscal year or during the twelve-
month fiscal period ending with such six-month period, if the first 
offer of securities pursuant to this section is made during the last 
six months of the issuer's current fiscal year.

    (d) Residence of purchasers. Sales of securities pursuant to this 
section (Sec.  230.147) shall be made only to persons that the issuer 
reasonably believes at the time of sale are residents of the state or 
territory in which the issuer has its principal place of business. For 
purposes of determining the residence of purchasers:
    (1) A corporation, partnership, limited liability company, trust or 
other form of business organization shall be deemed to be a resident of 
a state or territory if, at the time of sale to it, it has its 
principal place of business, as defined in paragraph (c)(1) of this 
section, within such state or territory.
    (2) Individuals shall be deemed to be residents of a state or 
territory if such individuals have, at the time of sale to them, their 
principal residence in the state or territory.
    (3) A corporation, partnership, trust or other form of business 
organization, which is organized for the specific purpose of acquiring 
securities offered pursuant to this section (Sec.  230.147), shall not 
be a resident of a state or territory unless all of the beneficial 
owners of such organization are residents of such state or territory.
    (e) Limitation on resales. For a period of nine months from the 
date of the sale by the issuer of a security pursuant to this section 
(Sec.  230.147), any resale of such security by a purchaser shall be 
made only to persons resident within the purchaser's state or territory 
of residence, as determined pursuant to paragraph (d) of this section.
    Instruction to Paragraph (e): In the case of convertible 
securities, resales of either the convertible security, or if it is 
converted, the underlying security, could be made during the period 
described in paragraph (e) only to persons resident within such state 
or territory. For purposes of this paragraph (e), a conversion in 
reliance on section 3(a)(9) of the Act (15 U.S.C. 77c(a)(9)) does not 
begin a new period.
    (f) Precautions against interstate sales. (1) The issuer shall, in 
connection with any securities sold by it pursuant to this section:
    (i) Place a prominent legend on the certificate or other document 
evidencing

[[Page 69832]]

the security stating that: ``Offers and sales of these securities were 
made under an exemption from registration and have not been registered 
under the Securities Act of 1933. For a period of nine months from the 
date of the sale by the issuer of these securities, any resale of these 
securities (or the underlying securities in the case of convertible 
securities) by a purchaser shall be made only to persons resident 
within the purchaser's state or territory of residence.''; and
    (ii) Issue stop transfer instructions to the issuer's transfer 
agent, if any, with respect to the securities, or, if the issuer 
transfers its own securities, make a notation in the appropriate 
records of the issuer.
    (2) The issuer shall, in connection with the issuance of new 
certificates for any of the securities that are sold pursuant to this 
section (Sec.  230.147) that are presented for transfer during the time 
period specified in paragraph (e), take the steps required by 
paragraphs (f)(1)(i) and (ii) of this section.
    (3) The issuer shall, at the time of any offer or sale by it of a 
security pursuant to this section (Sec.  230.147), prominently disclose 
to each offeree in the manner in which any such offer is communicated 
and to each purchaser of such security in writing the following: 
``Sales will be made only to residents of the same state or territory 
as the issuer. Offers and sales of these securities are made under an 
exemption from registration and have not been registered under the 
Securities Act of 1933. For a period of nine months from the date of 
the sale by the issuer of the securities, any resale of the securities 
(or the underlying securities in the case of convertible securities) by 
a purchaser shall be made only to persons resident within the 
purchaser's state or territory of residence.''
    (g) Integration with other offerings. Offers or sales made in 
reliance on this section will not be integrated with:
    (1) Prior offers or sales of securities; or
    (2) Subsequent offers or sales of securities that are:
    (i) Registered under the Act, except as provided in paragraph (h) 
of this section;
    (ii) Exempt from registration under Regulation A (Sec.  230.251 et 
seq.);
    (iii) Exempt from registration under Rule 701 (Sec.  230.701);
    (iv) Made pursuant to an employee benefit plan;
    (v) Exempt from registration under Regulation S (Sec. Sec.  230.901 
through 230.905);
    (vi) Exempt from registration under section 4(a)(6) of the Act (15 
U.S.C. 77d(a)(6)); or
    (vii) Made more than six months after the completion of an offering 
conducted pursuant to this section.

    Note to Paragraph (g): If none of the safe harbors applies, 
whether subsequent offers and sales of securities will be integrated 
with any securities offered or sold pursuant to this section (Sec.  
230.147) will depend on the particular facts and circumstances.

    (h) Offerings limited to qualified institutional buyers and 
institutional accredited investors. Where an issuer decides to register 
an offering under the Securities Act after making offers in reliance on 
Rule 147 limited only to qualified institutional buyers and 
institutional accredited investors referenced in Section 5(d) of the 
Securities Act, such offers will not be subject to integration with any 
subsequent registered offering. If the issuer makes offers in reliance 
on Rule 147 to persons other than qualified institutional buyers and 
institutional accredited investors referenced in Section 5(d) of the 
Securities Act, such offers will not be subject to integration if the 
issuer (and any underwriter, broker, dealer, or agent used by the 
issuer in connection with the proposed offering) waits at least 30 
calendar days between the last such offer made in reliance on Rule 147 
and the filing of the registration statement with the Commission.
0
3. In Sec.  230.504, the section heading and paragraph (b)(2) are 
revised, and paragraph (b)(3) is added, to read as follows:


Sec.  230.504  Exemption for limited offerings and sales of securities 
not exceeding $5,000,000.

* * * * *
    (b) * * *
    (2) The aggregate offering price for an offering of securities 
under this Sec.  230.504, as defined in Sec.  230.501(c), shall not 
exceed $5,000,000, less the aggregate offering price for all securities 
sold within the twelve months before the start of and during the 
offering of securities under this Sec.  230.504, in reliance on any 
exemption under section 3(b)(1), or in violation of section 5(a) of the 
Securities Act.

    Note 1 to paragraph (b)(2): The calculation of the aggregate 
offering price is illustrated as follows:
    If an issuer sold $900,000 on June 1, 2013 under this Sec.  
230.504 and an additional $4,100,000 on December 1, 2013 under Sec.  
230.505, the issuer could only sell $900,000 of its securities under 
this Sec.  230.504 on June 1, 2014. Until December 1, 2014, the 
issuer must count the December 1, 2013 sale towards the $5,000,000 
limit within the preceding twelve months.


    Note 2 to paragraph (b)(2): If a transaction under Sec.  230.504 
fails to meet the limitation on the aggregate offering price, it 
does not affect the availability of this Sec.  230.504 for the other 
transactions considered in applying such limitation. For example, if 
an issuer sold $5,000,000 of its securities on January 1, 2014 under 
this Sec.  230.504 and an additional $500,000 of its securities on 
July 1, 2014, this Sec.  230.504 would not be available for the 
later sale, but would still be applicable to the January 1, 2014 
sale.

    (3) Disqualifications. No exemption under this section shall be 
available for the securities of any issuer if such issuer would be 
subject to disqualification under Sec.  230.506(d) of this section on 
or after January 11, 2016; provided that disclosure of prior ``bad 
actor'' events shall be required in accordance with Sec.  230.506(e).

    Note to paragraph (b)(3). For purposes of disclosure of prior 
``bad actor'' events pursuant to Sec.  230.506(e), an issuer shall 
furnish to each purchaser, a reasonable time prior to sale, a 
description in writing of any matters that would have triggered 
disqualification under this paragraph (b)(3) but occurred before 
January 11, 2016.

* * * * *
0
4. In Sec.  230.505, paragraph (b)(2)(i) is revised to read as follows:


Sec.  230.505  Exemption for limited offers and sales of securities not 
exceeding $5,000,000.

* * * * *
    (b) * * *
    (2) Specific conditions--(i) Limitation on aggregate offering 
price. The aggregate offering price for an offering of securities under 
this Sec.  230.505, as defined in Sec.  230.501(c), shall not exceed 
$5,000,000, less the aggregate offering price for all securities sold 
within the twelve months before the start of and during the offering of 
securities under this section in reliance on any exemption under 
section 3(b)(1) of the Act or in violation of section 5(a) of the Act.
* * * * *

    By the Commission.

    Dated: October 30, 2015.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-28219 Filed 11-9-15; 8:45 am]
 BILLING CODE 8011-01-P


