Regulation D Rule 504 (b)(3) Supporting Statement.final.2020

SUPPORTING STATEMENT FOR THE PAPERWORK REDUCTION ACT
INFORMATION COLLECTION SUBMISSION FOR FINAL AMENDMENTS TO
RULE 504(b)(3) OF REGULATION D

A.

JUSTIFICATION
1.

CIRCUMSTANCES MAKING THE COLLECTION OF INFORMATION
NECESSARY

The Securities Act of 1933 (the “Securities Act”) requires that a registration statement
be filed with the Securities and Exchange 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 Sections 3(b) and 4(a)(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 or for the protection of investors because of the small amount involved or the
limited character of the public offering. Section 4(a)(2) of the Securities Act exempts
transactions by an issuer not involving any public offering. Pursuant to these provisions, the
Commission has adopted various rules (collectively “Regulation D”) establishing small issues
or limited offering exemptions from the registration requirements of the Securities Act.
Specifically, Rules 504 and 506 provide exemptions for offerings that satisfy certain conditions,
including a limitation on the aggregate dollar amount of securities that may be offered in any
twelve-month period, as well as the type and/or number of investors that may participate.
Rule 504 provides an exemption to issuers for an aggregate offering amount up to $5
million of their securities in any twelve-month period and disqualifies certain bad actors from
participation in Rule 504 offerings.
For all Regulation D offerings, Form D must be filed with the Commission no later than
15 days after the first sale of securities in the offering. The Form D is a simple notice that
provides certain information about the issuer and the offering.
Rule 504 disqualifies issuers from reliance on Rule 504 if such issuer would be subject to
disqualification under Rule 506(d) of Regulation D. Consistent with the requirements of Rule
506(e), Rule 504(b)(3) requires the issuer in a Rule 504 offering to furnish to each purchaser, a
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reasonable time prior to sale, a written description of any matters that occurred before January
20, 2017, the date of effectiveness of the amendments to the rule adopting these disqualification
provisions and within the time periods described in the list of disqualification events set forth in
Rule 506(d)(1) of Regulation D, in regard to the issuer or any other “covered person” associated
with the offering. For purposes of the mandatory disclosure provision described in the
instruction to Rule 504(b)(3), issuers are 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.
The Regulation D Rule 504(b)(3) Felons and Other Bad Actors Disclosure Statement
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.
2.

PURPOSE AND USE OF THE INFORMATION COLLECTION

The disclosure or paperwork burden imposed on issuers appears in an instruction to
Rule 504(b)(3) and pertains to events that occurred before effectiveness of the amendments
to the rule adopting these disqualification provisions (i.e., prior to January 20, 2017) but
which would have triggered disqualification had they occurred on or after effectiveness of
these amendments. Since the effectiveness of these amendments on January 20, 2017,
issuers relying on Rule 504 are required to furnish disclosure of any relevant past events
that would have triggered disqualification under Rule 504(b)(3) had they occurred on or
after January 20, 2017 that relate to the issuer or any other covered person. If there are any
such events, a disclosure statement is required to be furnished, a reasonable time before sale,
to all purchasers in the offering. The disclosure requirement serves to protect purchasers by
ensuring that they receive information regarding any covered persons that were subject to
such disqualifying events.
3.

CONSIDERATION GIVEN TO INFORMATION TECHNOLOGY

The collection of information requirements for the Regulation D Rule 504(b)(3) Felons
and Other Bad Actors Disclosure Statement is not provided to the Commission, either
electronically or otherwise.
4.

DUPLICATION OF INFORMATION

We are not aware of any rules that conflict with or substantially duplicate the
amendments to Rule 504.

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5.

REDUCING THE BURDEN ON SMALL ENTITIES

Regulation D is a comprehensive set of exemptions from registration relating to small
issues and small issuers. Regulation D was designed to simplify and clarify existing exemptions
and to expand their availability to small issuers.
The Regulation D Rule 504(b)(3) Felons and Other Bad Actors Disclosure Statement
applies to all issuers, including small entities. The requirement does not vary depending on the
size of the issuer. We believe that many of the issuers in these Rule 504 private offerings are
small entities, but we currently do not collect information on total assets of companies and net
assets of funds to determine if they are small entities.
6.

CONSEQUENCES OF NOT CONDUCTING COLLECTION

The purpose of collecting Form D information is to provide the Commission with
information to observe use of the Regulation D exemption.
In contrast, the purpose of the Regulation D Rule 504(b)(3) Felons and Other Bad
Actors Disclosure Statement is to alert potential investors about the “bad actor” history of
issuers conducting securities offerings, as well as the issuer’s covered persons. Adopting the
bad actor disqualification amendments to Rule 504 without the Rule 504(b)(3) disclosure
requirement would weaken the investor protection benefits intended by the disqualification
provisions of Rule 506(d) by enabling issuers and other covered persons with a “bad actor”
history to avoid disclosing that history to potential investors.
7.

SPECIAL CIRCUMSTANCES

No special circumstances at this time.
8.

CONSULTATIONS WITH PERSONS OUTSIDE THE AGENCY

No comments were received during the 60 Day comment period prior to OMB’s review
of this submission.
9.

PAYMENT OR GIFT TO RESPONDENTS

No payment or gift to respondents.
10.

CONFIDENTIALITY

No information is filed with the Commission pursuant to Rule 504(b)(3).

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11.

SENSITIVE QUESTIONS

The information collection collects Personally Identifiable Information (PII) of certain
individuals. In accordance with Section 208 of the E-Government Act of 2002, the agency has
conducted a Privacy Impact Assessment (PIA) of the EDGAR system, in connection with this
collection of information. The EDGAR PIA, published on February 5, 2020, is provided as a
supplemental document and is also available at https://www.sec.gov/privacy. The agency has
determined that the information collection does not constitute a system of record for purposes of
the Privacy Act as information is not retrieved by a personal identifier.
12/13. ESTIMATES OF HOUR AND COST BURDENS
The estimated burden hours and cost burden are made solely for the purposes of the
PRA and represent the average burden for all issuers. The cost burden is not derived from
a comprehensive or even a representative survey of the costs of Commission rules and
forms.
We anticipate that the Regulation D Rule 504(b)(3) Felons and Other Bad Actors
Disclosure Statement results 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
bad actor disqualification amendments (i.e., prior to January 20, 2017). For purposes of the
PRA, we estimate the total annual increase in paperwork burden for all affected Rule 504 issuers
to comply with our new collection of information requirements would be approximately 880
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 will 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, we assume that:






Approximately 800 issuers relying on Rule 504 of Regulation D will 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 amendments (i.e., prior to January 20, 2017); and
On the basis of the factual inquiry, approximately eight issuers (or approximately
1%) will 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 amendments (i.e., on or after
January 20, 2017); and
For purposes of the Rule 504(b)(3) disclosure statement, approximately eight
issuers will retain outside professional firms to spend three hours on disclosure
preparation at an average cost of $400 per hour.

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The increase in burdens and costs associated with conducting a factual inquiry for the
disclosure statement requirement should be minimal given that issuers are likely to conduct
simultaneously a similar factual inquiry for purposes of determining disqualification from
Rule 504 for disqualifying events occurring on or after January 20, 2017.
14.

COSTS TO FEDERAL GOVERNMENT

The annual cost of reviewing and processing disclosure documents, including registration
statements, post-effective amendments, proxy statements, annual reports and other filings of
operating companies amounted to $102 million in fiscal year 2018, based on the Commission’s
computation of the value of staff time devoted to this activity and related overhead.
15.

REASON FOR CHANGE IN BURDEN

There is no change in burden.
16.

INFORMATION COLLECTION PLANNED FOR STATISTICAL
PURPOSES

The information collection is not planned for statistical purposes.
17.

APPROVAL TO OMIT OMB EXPIRATION DATE

In regard to the Regulation D Rule 504(b)(3) Felons and Other Bad Actors Disclosure
Statement, since this requirement 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 Commission is not seeking approval to omit the expiration date.
18.

EXCEPTIONS TO CERTIFICATION FOR PAPERWORK
REDUCTION ACT SUBMISSIONS

There are no exceptions to certification for Paperwork Reduction Act submissions.
B.

STATISTICAL METHODS
The information collection does not employ statistical methods.

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