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SECURITIES AND EXCHANGE COMMISSION

ADVISORY COMMITTEE ON 

SMALL AND EMERGING COMPANIES

Washington, DC 20549-3628

 May __, 2017

The Honorable Jay Clayton

Chairman

U.S. Securities and Exchange Commission

100 F Street, N.E.

Washington, DC 20549-1070

Dear Chairman Clayton:

As you know, the Securities and Exchange Commission organized the Advisory Committee on 

Small and Emerging Companies to provide the Commission with advice on the Commission’s 

rules, regulations, and policies with regard to its mission of protecting investors, maintaining 

fair, orderly, and efficient markets, and facilitating capital formation, as they relate to the 

following: 

(1) capital raising by emerging privately held small businesses and publicly traded 

companies with less than $250 million in public market capitalization;

(2) trading in the securities of such businesses and companies; and 

(3) public reporting and corporate governance requirements to which such businesses 

and companies are subject.

On behalf of the Advisory Committee, we are pleased to submit the enclosed recommendation

regarding secondary market liquidity for Regulation A securities. This recommendation was

discussed at Advisory Committee meeting held on February 15, 2017, and approved by the 

members of the Advisory Committee present and voting at a meeting held May 10, 2017. 

We and the other members of the Advisory Committee are prepared to provide any additional 

assistance that the Commission or its staff may request with respect to these recommendations.

Respectfully submitted on behalf of the Advisory Committee,

Stephen M. Graham Sara Hanks

Committee Co-Chair Committee Co-Chair
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Members of the Advisory Committee

Robert Aguilar

Xavier Gutierrez*

Brian Hahn

Jenny Kassan

Catherine V. Mott

Jonathan Nelson

Patrick Reardon

Lisa Shimkat

Annemarie Tierney

Gregory C. Yadley*

Laura Yamanaka

Non-voting members

Michael Pieciak

Michele Schimpp

* These members plus Co-Chair Stephen Graham were not present at the meeting held on 

February 15, 2017.

** These members were not present for the Advisory Committee discussion and vote held on 

May 10, 2017. 

Enclosure

cc: Commissioner Michael S. Piwowar 

Commissioner Kara M. Stein

Shelley E. Parratt 

Elizabeth Murphy

Sebastian Gomez Abero

Julie Z. Davis
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U.S. Securities and Exchange Commission 

Advisory Committee on Small and Emerging Companies 

Recommendation Regarding Secondary Market Liquidity for 

Regulation A, Tier 2 Securities

AFTER CONSIDERING THAT: 

1) The Advisory Committee’s objective is to provide the U.S. Securities and Exchange 

Commission (the “Commission”) with advice on its rules, regulations and policies with 

regard to its mission of protecting investors, maintaining fair, orderly and efficient markets, 

and facilitating capital formation, as they relate to, among other things, capital raising by 

emerging privately held small businesses and publicly traded companies with less than $250 

million in public market capitalization.

2) Secondary market liquidity is integral to capital formation. Small businesses trying to attract 

capital often struggle because potential backers are reluctant to invest unless they are

confident there will be an exit opportunity. Capital is often more expensive or not available 

for issuers that are not able to provide investors with secondary market liquidity.

3) Limited possibilities for liquidity means investors’ capital may be locked up longer than they

would like, hindering their ability to build portfolios with multiple, diverse investments. 

Liquidity limitations also prevent capital from being put to use in the next investment. 

4) Regulation A provides for the preemption of state securities law registration and qualification 

requirements for securities initially offered or sold in Tier 2 offerings; however, secondary 

sales of these same Tier 2 Regulation A securities require compliance with disparate state 

law requirements. This means willing sellers and buyers in the secondary trading market 

must find exemptions on a state by state basis. 

5) There are substantive differences in the various state exemptions. This lack of uniformity 

inhibits the development of a national secondary trading market.

6) One popular exemption for secondary trading is the “manual exemption,” which is currently 

available in 39 of the 54 U.S. jurisdictions. These provide an exemption for secondary 

trading by non-issuers through a broker dealer, if the issuing company has financial and other 

information published in a designated securities manual. The exemption is based on the 

availability in the manual of current information about an issuer that enables parties on both 

sides of the trade to make an educated investment decision.

7) While there used to be more, there is currently only one remaining designated securities 

manual (published by Mergent, formerly known as Moody’s). However, company 

information available on certain OTC Markets marketplaces is now recognized for purposes 

of the state blue sky manual exemption in 21 jurisdictions. 
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8) Complying with the manual exemption can be costly for companies, since issuers must pay 

to have their information disseminated. Additionally, there is not currently a centralized 

information portal accepted by all jurisdictions where investors can find that information.

9) Tier 2 Regulation A issuers are subject to initial and ongoing disclosure requirements that are 

greater than the information that is included in a manual. 

10) The information in Tier 2 Regulation A ongoing reports is easily available to the public on 

EDGAR.

11) The SEC and the states have a collaborative, productive relationship, with a recent capital 

formation success in the adoption of the Commission’s Securities Act Rule 147A to help 

facilitate intrastate offerings. 

THE COMMITTEE RECOMMENDS THAT: 

1. The Commission take steps to help reduce friction in secondary trading by holders of Tier 

2 Regulation A securities where the issuer is current in its ongoing reports.

2. The Commission collaborate with NASAA in this endeavor. 

3. The Commission consider using its authority under Section 18 of the Securities Act to 

preempt from state regulation the secondary trading in securities of Tier 2 Regulation A

issuers that are current in their ongoing reports. This approach would replicate what is 

the equivalent of a uniform manual exemption across all 54 jurisdictions, with EDGAR 

serving as the central repository. 

[An alternative #3:

The Commission consider effectuating the equivalent of a manual exemption that applies 

nationally, with the ongoing reports filed in EDGAR by Tier 2 Regulation A issuers providing 

the information necessary for parties to make educated investment decisions.]