SUPPORTING STATEMENT FOR REGULATION D
Justification
1. Necessity of Information Collection
The Securities Act of 1933 requires that a registration statement be filed with the Commission disclosing prescribed information before securities may be offered for sale to the public. The securities cannot be sold to the public until the registration statement becomes effective. In addition, prospective investors must be furnished a prospectus containing the most significant information in the registration statement. Congress, however, recognized that there are certain situations where there is no practical need for registration or where the public benefits derived from registration are too remote. Accordingly, a number of exemptions to the registration requirements are contained in the Securities Act. The exemptions that small businesses most typically rely on are those provided by Section 3(b) and 4(2).
The Commission is authorized under Section 3(b) of the Securities Act to exempt securities from registration if it finds that registration for these securities is not necessary in the public interest because of the small amount involved or the limited character of the public offering. Pursuant to this authority, the Commission has adopted various exemptive rules and regulations, beneficial to small businesses wishing to raise limited amounts of capital. For example, Rules 504 and 505 of Regulation D were adopted pursuant to Section 3(b) [17 CFR 230.504 and 230.505]. Rule 504 is the “seed capital” rule of Regulation D. It permits non-reporting issuers to raise up to $1 million in a 12-month period. There is no limitation on the number of offerees or purchasers. There also is no federal information delivery requirement. In February 1999, the Commission adopted amendments to Rule 504 to provide that general solicitation is: (1) permitted and “freely tradable” securities may be issued in reliance upon Rule 504 only when the transactions have been registered under state law requiring public filing and delivery of a disclosure document to investors before sale; or (2) the transactions are exempted under state law permitting general solicitation and advertising so long as sales are made only to accredited investors.
Rule 505, on the other hand, allows any issuer to raise up to $5 million in a 12-month period. The rule, however, prohibits the issuer from engaging in a general solicitation or using advertising. An issuer can sell to an unlimited number of accredited investors and up to 35 non-accredited investors. Certain issuer information must be provided to non-accredited investors. Section 2(15) of the Securities Act and Rule 501(a) of Regulation D define the term “accredited investor.”
Section 4(2) of the 1933 Act exempts transactions “by an issuer not involving any public offering.” Rule 506 of Regulation D was adopted pursuant to Section 4(2). Like Rule 505, Rule 506 does not permit general solicitation or advertising. An issuer can sell to an unlimited number of accredited investors and up to 35 non-accredited investors; however, these latter investors must receive certain issuer information. Unlike Rule 505, any non-accredited investors must be “sophisticated”. Securities issued under Rule 505 and 506 are restricted.
All Regulation D offerings require that Form D be filed with the Commission no later than 15 days after the first sale in the offering. The Form D is a simple six-page notice that provides certain information about the issuer and the offering.
Purposes of, and Consequences of Not Requiring, the Information Collection
An important purpose of the notice is to collect empirical data, which provides a continuing basis for action by the Commission either in terms of amending existing rules and regulations or proposing new ones. Further, the Form allows the Commission to elicit information necessary in assessing the effectiveness of Regulation D and Section 4(6) as capital-raising devices for small businesses.
3. Role of Improved Information Technology and Obstacles to Reducing Burden
Form D is filed using the Commission Electronic Data Gathering, Analysis and Retrieval System (EDGAR).
4. Efforts to Identify Duplication
There is no public source for the information provided on Form D.
5. Effect on Small Entities
Rule 504 of Regulation D is specifically designed to be the “seed capital” exemption for small businesses. It permits a non-reporting company to raise up to $1 million in a 12-month period with minimal federal regulation. However, Rule 504 issuers are subject to federal antifraud and other civil liability provisions.
Rules 505 and 506 of Regulation D are available for issuers of any size; these issuers may be reporting or non-reporting, but Rule 505 issuers cannot be investment companies or be subject to any of the “bad boy” provisions of Rule 262 of Regulation A. Rule 505 permits issuers to raise up to $5 million in a 12-month period so long as the conditions outlined above are satisfied. Rule 506 allows issuers to raise an unlimited amount of money provided that the conditions set forth above are satisfied.
Consequences of Less Frequent Collection
The purpose of collecting Form D information is to provide small businesses with an avenue to offer and sell securities without incurring the costs and burdens traditionally associated with full registration under the 1933 Act. As a result, this provides the public with the necessary information to make sound investment decisions when planning their financial futures.
7. Inconsistencies with Guidelines in 5 CFR 1320.6
Multiple copies of the Form D are needed because they must be distributed to several different offices, including the File Desk whose copy goes to the contractor and is key punched into a Form D database; the Public Reference Room, the appropriate Regional Office; the contractor responsible for microfiche copies of Commission Documents; and the Office of Small Business in the Division of Corporation Finance.
8. Consultations Outside the Agency
Form D was proposed for public comment. No comments were received during the 60-day comment period prior to OMB’s review.
9. Payment or Gift to Respondents
Not applicable.
10. Assurances of Confidentiality
Not applicable.
Sensitive Questions
Not applicable.
12. Estimate of Respondent reporting Burden
Form D takes approximately 4 hours per response to prepared and is filed by 25,000 issuers annually. We estimate that 25% of the 4 hours per response (1 hour) is prepared by the issuer for an annual reporting burden of 25,000 hours (1 hour per response x 25,000 responses). The estimated burden hours are made solely for the purposes of the Paperwork Reduction Act.
13. Estimate of Total Annualized Cost Burden
We estimate that 75% of the 4 hours per response (3 hours) is prepared by outside counsel. We estimate the law firm cost to be $400 per hour ($400 per hour x 3 hours per response x 25,000 responses) for a total cost burden of $30,000,000. The estimated cost burden is made solely for purposes of the Paperwork Reduction Act. The cost burden is not derived from a comprehensive or even a representative survey of the costs of Commission rules and forms.
14. Estimate of Cost to the Federal Government
There is no information readily available to estimate the cost to the federal government.
However, Form D is an electronically filed notice and we believe the cost to the federal government is minimal.
Explanation of Change in Burden
The increase burden hours and the increase in cost burden are due to two agency adjustments. First, the burden hour increased by 7,500 burden hours as a result of an increase in the number of responses filed from 17,500 to 25,000. Second, the cost burden increased by $14,250,000 is due to the Commission increasing its cost estimate from $300 per hour to $400 per hour for outside counselors.
16. Information Collections Planned for Statistical Purposes
Not applicable.
17. Explanation as to Why the Expiration Date Will Not Be Displayed
Not applicable.
18. Exception to Certification
Not applicable.
B. Collection of Information Employing Statistical Methods
Not applicable.
| File Type | application/msword |
| File Title | SUPPORTING STATEMENT FOR REGULATION D |
| Last Modified By | crawleyp |
| File Modified | 2009-04-09 |
| File Created | 2009-03-20 |