On November 1, 2018, the North American Securities Administrators Association, Inc. (“NASAA”) released for public comment proposed updates to the SCOR Statement of Policy and the SCOR Form (Form U-7).  According to the NASAA, the proposed updates are meant to incorporate many of the investor protections that have been put in place under state and federal crowdfunding laws in light of the evolution and availability of methods to raise capital in small offerings.

Changes to the SCOR Statement of Policy (last updated in 1996)

  • Application of SCOR:  The proposed updates amend the types of federal exempt offerings that can be registered at the state level under the SCOR Statement of Policy.  Specifically, SCOR will no longer apply to Regulation A offerings, but will apply to the registration of intrastate offerings exempt under new federal Rule 147A.  Additionally, the proposed updates increase the offering amount limitation from $1 million to $5 million, in line with the Rule 504 offering amount limitation increase.
  • Issuer Eligibility:  The proposed updates remove the existing requirement that the offering price for securities offered be greater than or equal to $1.00 per share or unit of interest.
  • Financial Statements:  The proposed updates revise the financial statement requirements to provide for tiered compilation, review, and audit requirements based on the amount of the offering.  In addition to the tiered approach, the proposed updates require (1) an issuer’s CEO and CFO to certify that annual financial statements are true and complete in all material respects and (2) an issuer provide interim financial statements if annual financial statements are dated more than 120 days prior to the date of filing.  The proposed updates to the financial statement requirements are based on Regulation Crowdfunding.
  • Bad Actor Disqualifications:  The proposed updates revise the bad actor disqualification provisions to merge aspects of federal bad actor provisions applicable to Rule 506 and Rule 504 offerings and to capture individuals materially participating in the offering or the operations of the issuer, as well as events that may include the potential for fraud.  The proposed updates, however, veer from related federal provisions and do not grandfather any bad acts that occurred prior to the adoption of the SCOR Statement of Policy.
  • Investment Limits:  The proposed updates incorporate the individual investment limits set forth in federal Regulation Crowdfunding and require that in each sale of securities in a SCOR offering, an issuer must reasonably believe that the aggregate amount of securities sold to any investor by one or more issuers offering or selling securities under a SCOR offering during the twelve-month period preceding the date of sale, together with the securities sold by the issuer to the investor, does not exceed:
    1. The greater of $2,000 or 5% of the lesser of the investor’s annual income or net worth if either the investor’s annual income or net worth is less than $100,000; or
    2. 10% of the lesser of the investor’s annual income or net worth, not to exceed an amount sold of $100,000, if both the investor’s annual income and net worth are equal to or more than $100,000.
  • Sales Reporting Requirement:  The proposed updates incorporate a sales reporting requirement similar to that contained in intrastate crowdfunding laws and federal Regulation Crowdfunding, which would require an issuer to file a sales report no later than 30 days after the termination or completion of an offering or, if the offering has not been terminated or completed within 12 months, file a sales report containing the information required in Section VIIIA for the initial 12 months.
  • Ongoing Reporting Obligations:  The proposed updates incorporate ongoing reporting requirements based on those required under Regulation Crowdfunding.  An issuer would be subject to the ongoing reporting requirements until the earlier of (1) the securities issued in connection with the SCOR offering are no longer outstanding or (2) the issuer liquidates or dissolves its business.
  • Review Standards:  The proposed updates include a new provision related to review standards and, unlike the proposed updates set forth above, is optional.  In jurisdictions that choose to adopt this provision, offerings will be reviewed for disclosure and for compliance with applicable Statements of Policy with certain modifications incorporated from NASAA’s Coordinated Review Protocol for Regulation A offerings.  Specifically, (1) the Statement of Policy Regarding Promoters’ Equity Investment will not apply and (2) the Statement of Policy Regarding Promotional Shares will apply except that one-half of any promotional shares required to be locked-in or escrowed may be released on the first and second anniversary of the date of completion of the offering, such that all shares may be released from lock-in or escrow by the second anniversary of the date of completion of the offering.

Changes to the SCOR Form (Form U-7) (last updated in 1999)

  • The proposed updates to the SCOR Form are meant to streamline the form by removing duplicative or unnecessary items and to make the form more user friendly.

Comments on the proposed updates to the SCOR Statement of Policy and SCOR Form are due by December 3, 2018.

On October 23, 2018, the Heritage Foundation hosted a discussion entitled, “Problems with the JOBS Act and How They Can Be Fixed” that featured University of Kentucky College of Law Professor Rutherford B. Campbell. The discussion centered on the impact of the 2012 Jumpstart Our Business Startups Act (the “JOBS Act”), its benefits, its shortcomings, and recommendations on how to address those shortcomings related to Titles II, III and IV.

The JOBS Act was enacted to reduce the regulatory burden on small businesses seeking to raise capital to launch or grow their business. Campbell praised Title II’s elimination of the prohibition against general solicitation and general advertising under Rule 506(c). However, he lamented that Rule 506(c) was still limited to sales to accredited investors. Campbell discussed Title III and argued that small businesses are simply not utilizing Regulation Crowdfunding. Campbell noted the mere $49 million in funds that was raised through Regulation Crowdfunding in 2017. He asserted that the limitations and concerns regarding integration “make no sense at all.” As an alternative, Campbell recommends a two-way regulatory integration safe harbor that allows for crowdfunding and permits traditional advertising while conducting a campaign. Additionally, Campbell recommends rethinking the periodic reporting requirement under Regulation Crowdfunding. By doing so, Campbell believes more small businesses will utilize Regulation Crowdfunding. Campbell then examined Regulation A+ under Title IV, noting there are still compliance, accounting and legal hindrances. As a solution, Campbell proposes federal preemption for Tier 1 offerings. Overall, Campbell advocates for the implementation of these recommendations to enhance the current regulatory framework for small business capital formation.

At the Practising Law Institute’s Annual Institute on Securities Regulation, a number of updates were provided by the Staff regarding ongoing initiatives within the Office of Small Business.  The Staff reviewed the recently adopted amendments to the definition of “smaller reporting company” (SRC) and directed practitioners to its Small Entity Compliance Guide.  The Staff also noted that a number of Compliance & Disclosure Interpretations were recently updated to address changes brought about by the SRC amendments.  The C&DIs also were recently reorganized and are now grouped by category, making these much easier to navigate.  Below, we highlight a few of the C&DIs relating to SRC status:

Question 104.13
Question: An issuer files its 2019 Form 10-K using the disclosure permitted for smaller reporting companies under Regulation S-K. The cover page of the Form 10-K indicates that the issuer will no longer qualify to use the smaller reporting company disclosure for 2020 because its public float exceeded $250 million at the end of its second fiscal quarter in 2019. The issuer proposes to rely on General Instruction G(3) to incorporate by reference executive compensation and other disclosure required by Part III of Form 10-K into the 2019 Form 10-K from its definitive proxy statement to be filed not later than 120 days after its 2019 fiscal year end. May the issuer use smaller reporting company disclosure in this proxy statement, even though it does not qualify to use smaller reporting company disclosure for 2020?

Answer: Yes, because the issuer could have used the smaller reporting company disclosure for Part III of its 2019 Form 10-K if it had not used General Instruction G(3) to incorporate that information by reference from the definitive proxy statement. [November 7, 2018]

Question 102.01
Question: Could a company with a fiscal year ended December 31, 2018 be both a “smaller reporting company,” as defined in Item 10(f), and an “accelerated filer,” as defined in Rule 12b-2 under the Exchange Act, for filings due in 2019, if it was an accelerated filer with respect to filings due in 2018 and had a public float of $80 million on the last business day of its second fiscal quarter of 2018?

Answer: Yes. A company must look to the definitions of “smaller reporting company” and “accelerated filer” to determine if it qualifies as a smaller reporting company and non-accelerated filer for each year. This company will qualify as a smaller reporting company for filings due in 2019 because on the last business day of its second fiscal quarter of 2018 it had a public float below $250 million. However, because the company was an accelerated filer with respect to filings due in 2018, it is required to have less than $50 million in public float on the last business day of its second fiscal quarter in 2018 to exit accelerated filer status for filings due in 2019, as provided in paragraph (3)(ii) of the definition of “accelerated filer” in Rule 12b-2. This company had a public float of $80 million on the last business day of its second fiscal quarter of 2018, and therefore is unable to transition to non-accelerated filer status. As this example illustrates, a company can be both an accelerated filer and a smaller reporting company at the same time. Such a company may use the scaled disclosure rules for smaller reporting companies in its annual report on Form 10-K, but the report is due 75 days after the end of its fiscal year and must include the Sarbanes-Oxley Section 404 auditor attestation report described in Item 308(b) of Regulation S-K. [November 7, 2018]

Question 102.02
Question: Will a company that does not qualify as a smaller reporting company for filings due in a particular year be able to qualify as a smaller reporting company if its public float or annual revenues later decrease?

Answer: Once a reporting company determines that it does not qualify as a smaller reporting company, it will remain unqualified unless when making a subsequent annual determination either:

  • It determines that its public float is less than $200 million; or
  • It determines that:
    • for any threshold that it previously exceeded, it is below the subsequent annual determination threshold (public float of less than $560 million and annual revenues of less than $80 million); and
    • for any threshold that it previously met, it remains below the initial determination threshold (public float of less than $700 million or no public float and annual revenues of less than $100 million). See Amendments to the Smaller Reporting Company Definition – Compliance Guide for more information.

Example: A company has a December 31 fiscal year end. Its public float as of June 28, 2019 was $710 million and its annual revenues for the fiscal year ended December 31, 2018 were $90 million. It therefore does not qualify as a smaller reporting company. At the next determination date, June 30, 2020, it will remain unqualified unless it determines that its public float as of June 30, 2020 was less than $560 million and its annual revenues for the fiscal year ended December 31, 2019 remained less than $100 million. [November 7, 2018]

The Staff also provided some insights regarding reliance on exempt offering alternatives.  For the twelve months ended June 30, 2018, approximately $1.2 trillion was raised in Rule 506 offerings, of which nearly 97% was raised in reliance on Rule 506(b) offerings.  Most of this was attributable to offerings by funds, although operating company offerings accounted for approximately $175 billion.  The Staff has noted a slow but steady increase in the number of Rule 506(c) transactions.  Regulation A offering activity also has been robust.  For the three years from effectiveness of the amendments to Regulation A through September 30, 2018, there were 257 offerings qualified and nearly $1.3 billion raised in Regulation A offerings.  Real estate and REIT offerings account for the largest percentage of these transactions.  The Staff noted it is currently working on recommendations in order to implement the rulemaking mandate to make Regulation A available to reporting companies.  Finally, the Staff also is working on a review of exempt offering alternatives that would, among other things, seek to harmonize the requirements for various offering exemptions.


The Securities and Exchange Commission’s Division of Economic and Risk Analysis (DERA) has regularly updated its studies regarding the market for unregistered securities offerings.  The most recent study provides data through the end of 2017.  Over $3.0 trillion was raised in unregistered securities transactions in 2017.  By contrast, registered offerings accounted for approximately $1.5 trillion.  Approximately $1.8 trillion was raised in Regulation D offerings, which surpasses the amount of capital raised in public offerings.  Of this amount, most was raised in Rule 506(b) offerings and pooled investment vehicles.  Some “repeat” issuers have switched to Rule 506(c).  Approximately 65% of the Regulation D offerings (by number) involve equity offerings.  The data presented in the study is based on information contained in Form D filings and, as a result, may understate the actual level of activity.

July 19 – 20, 2018

PLI New York Center
1177 Avenue of the Americas
(2nd Floor)
New York, NY 10036

This program will provide an overview and discussion of the basic aspects of the U.S. federal securities laws by leading in-house and law firm practitioners as well as SEC staff. Emphasis will be placed on the interplay among the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act, the Dodd-Frank Act, the JOBS Act, the securities related provisions of the FAST Act, related SEC regulations and significant legislative and regulatory changes and proposals.

Partner Anna Pinedo will lead a session titled “Securities Act Exemptions” on Day One of the program. Topics will include:

  • Exempt securities versus exempt transactions;
  • Private placements, including offerings under Rules 504 and 506 of Regulation D;
  • Regulation A+ offerings;
  • “Intrastate” offerings, including new Rule 147A;
  • Crowdfunding;
  • Employee equity awards;
  • Rule 144A offerings;
  • Regulation S offerings to “non-U.S. persons”; and
  • Resales of restricted and controlled securities: Rule 144, Section 4(a)(7) and 4(a)(1½).

PLI will provide CLE credit.

For more information, or to register, please visit the event website.

In his article, author Merritt B. Fox considers the appropriate disclosure requirements in the context of public offerings, such as offerings made in reliance on Rule 506(c), Regulation A, and Regulation CF, undertaken by privately held companies as to which there is little or no previously available information, resulting in information asymmetries. He begins his analysis by going back to first principles.  Information asymmetries may motivate potential investors to exact a significant discount from the issuer in connection with a financing.  The asymmetries can be addressed in a variety of ways, including reliance on intermediation by a gatekeeper like an underwriter.  Another, of course, is requiring disclosures to be made in connection with the proposed offering and/or following the completion of the offering.  Imposing issuer liability and underwriter liability would accompany the mandatory disclosure framework in order to compel issuers and gatekeepers to undertake their disclosure obligations seriously.  Having established these principles, Fox considers the current framework for each of the three offering exemptions.  In a Rule 506(c) offering, there is no required disclosure, and no ongoing disclosure obligation following completion of the offering.  An issuer is subject only to liability under Rule 10b-5 for material misstatements made in connection with the offering.  There is no underwriter taking principal risk that would function in the role of a gatekeeper.  There is no identified approach to addressing information asymmetries in Rule 506(c) offerings.  In Regulation A offerings, there is a mandatory disclosure requirement at the time of the offering and a periodic disclosure requirement following completion of the offering.  The issuer is subject to liability subject to a due diligence defense.  An underwriter participating in a Regulation A offering also is subject to liability. Regulation CF also requires that certain information be disclosed at the time of the offering, and in certain instances requires ongoing disclosures post offering.  The issuer also faces strict liability subject to a due diligence defense.  There is no “firm commitment” underwriter in a crowdfunded offering.  The article asks whether the reduced disclosure requirements are sensible when one considers the burdens that may be placed on smaller issuers, on the one hand, and the information asymmetries and possibility of adverse selection that are associated with the offering of new securities into the market.