Businesses can raise capital in the regulated securities markets through the public offering of securities, which is an offering of stock to the general public. For a small business, this could take the form of a registered public offering—an offering and sale of securities to the general public. Unless subject to a specific exemption, the Securities Act requires a business selling its securities to file a registration statement with SEC that includes a prospectus that discloses, among other things, the business’s operations, financial condition, security offering, risk factors, and management. Businesses that qualify as smaller reporting companies under SEC rules can file using disclosure requirements scaled for small businesses. The Securities Act requires that information provided to investors in connection with the offer or sale of the business’s securities include material information necessary to make an investment decision. SEC’s Division of Corporation Finance (Corporation Finance) reviews registration statements for compliance with disclosure and accounting requirements. Corporation Finance does not evaluate the accuracy of disclosure, the merits of any transaction, or determine whether an investment is appropriate for any investor. According to SEC, this review process is not a guarantee that the disclosure is complete and accurate— responsibility for complete and accurate disclosure lies with the business and others involved in the preparation of a business’s filings. Through the course of its review, Corporation Finance may issue comments to a company to elicit compliance with applicable disclosure requirements. In response to those comments, a business may revise its financial statements or amend its disclosure to provide additional information. According to SEC, this comment process is designed to provide investors with better disclosure necessary to make informed investment decisions, thus enhancing investor protection, facilitating capital formation, and enhancing the efficiency of the capital markets. When a business has resolved all comments from Corporation Finance on a Securities Act registration statement, the business may request that SEC declare the registration statement effective so that it can proceed with the transaction. A business cannot sell its securities until SEC declares the registration statement effective. The Small Business Investment Incentive Act of 1980 requires SEC to conduct an annual forum on small business capital formation. In 2011, SEC held its 30th forum. According to the resulting report on the forum, a major purpose of the forum is to provide a platform to highlight perceived unnecessary impediments to small business capital formation and address whether they can be eliminated or reduced.to develop recommendations for government and private action to improve the environment for small business capital formation, consistent with other public policy goals, including investor protection. The report made a number of recommendations, including a few related to Regulation A, such as raising the ceiling to $50 million and preempting Regulation A offerings from state blue sky law registration requirements. Regulation A represents an exercise by SEC of its authority under section 3(b) of the Securities Act to exempt offerings of securities from registration if it finds that registration “is not necessary in the public interest and for the protection of investors by reason of the small amount involved or the limited character of the public offering….” SEC has previously stated that the primary purpose in adopting Regulation A was to provide a simple and relatively inexpensive procedure for small business use in raising limited amounts of needed capital. A business that relies on Regulation A must (1) file for SEC staff review an offering statement that includes an offering circular and financial statements, and (2) provide the offering circular to investors. The offering statement also includes a notification and exhibits. The offering circular is expected to include, among other things, information on the company; officers, directors and key personnel; risk factors; use of proceeds; and plan for distributing the securities. SEC staff review the initial offering statement (for example, to determine if it complies with disclosure requirements) and determines if the offering is qualified (i.e., cleared by SEC). We discuss the review process in more detail later in this report. Like securities sold in registered offerings, Regulation A securities can be offered publicly and are freely tradable in the secondary market. In addition, Regulation A securities can be sold to both accredited and nonaccredited investors. Accredited investors include, among others, individuals whose net worth is more than $1 million (not including the value of their primary residence) or whose individual income exceeds at least $200,000 for the most recent 2 years and certain institutional investors, such as insurance companies, banks, and corporations with assets exceeding $5 million. Conversely, nonaccredited investors include any investor that does not meet the definition for an accredited investor. Although Regulation A offerings are generally subject to state blue sky laws, state exemptions for certain offerings might apply to a Regulation A issuer. The Uniform Securities Acts of 1956 and 2002, which form the basis for many blue sky laws, provide a series of exemptions from state- level registration for certain types of securities or transactions. For example, one exemption applies to sales to institutional investors, federally covered investment advisors, and other purchasers exempted by a state rule. Furthermore, the JOBS Act preempts state registration requirements for offerings under the new version of Regulation A if the securities are sold on a national securities exchange or to “qualified purchasers” as defined by SEC. Regulation D is designed to (1) eliminate any unnecessary restrictions that SEC rules place on small business issuers and (2) achieve uniformity between state and federal exemptions to facilitate capital formation consistent with protecting investors. Regulation D contains three separate but interrelated exemptive rules—Rules 504, 505, and 506—that allow some businesses to offer and sell their securities without having to register the securities with SEC.exemptions differ in relation to the size of the offerings to which they apply or the number and type of investors to which offerings may be made. As the following illustrates, the Rule 504 has a maximum offering amount of $1 million in any 12- month period and generally does not limit the number or type of investors. Rule 505 has a maximum offering amount of $5 million in any 12- month period, and the sales are limited to 35 nonaccredited investors and an unlimited number of accredited investors. Rule 506 has no dollar limitation and offerings can be sold to up to 35 nonaccredited, sophisticated investors and an unlimited number of accredited investors. While businesses do not have to register Regulation D offerings with SEC, they must notify SEC of initial sales in the offering. SEC does not comment on or approve these notifications. Businesses that make offerings under Rules 504 or 505 must register them at the state level if required in the state in which they are made, while offerings made under Rule 506 are preempted from state registration by the National Securities Markets Improvement Act of 1996. In addition to federal securities laws, state securities laws are designed to protect investors against fraudulent sales practices and activities. While these laws can vary from state to state, they require securities issuers (including businesses making small offerings) to register their offerings with the state before the offerings can be sold in that state unless state registration for the offering has been preempted by federal law or a state registration exemption applies. According to state securities administrators with whom we met, blue sky laws are beneficial because they provide an additional layer of protection for potential investors. Moreover, for states that have the statutory authority to assess the merit of an offering, the state can assess the extent to which the offering is fair to potential investors, and require the business to address the state’s concerns before the offering is registered. The number of Regulation A offerings filed and qualified has declined significantly after peaking in fiscal years 1997 and 1998 respectively (see fig. 1). The number of initial Regulation A offerings filed increased from 15 to 116 from 1992 through 1997. Similarly, the number of Regulation A offerings qualified increased from 14 to 56 during this same time. These increases followed SEC’s adoption of rules that raised the ceiling for Regulation A offerings from $1.5 to $5 million as well as allowing Regulation A offerors to “test the waters” by soliciting investor interest in the security before incurring preparation costs for the offering statement. However, since 1997, the number of initial Regulation A offerings filed decreased significantly—from 116 in 1997 to 19 in 2011. The number of qualified offerings also dropped dramatically after 1998, decreasing from 57 in 1998 to 1 in 2011. SEC has not evaluated the causes of changes in the use of Regulation A. Securities attorneys with whom we met stated that the decrease in filings after 1997 could be attributed to a number of different factors, including the increased attractiveness of Regulation D. The National Securities Markets Improvement Act of 1996 preempted state registration requirements for certain other categories of securities offerings (including Rule 506 of Regulation D)—potentially making these other options more attractive to businesses. Initial qualified Regulation A offerings have varied in size and purpose and represented a wide range of business lines. Specifically, from 2002 through 2011, the maximum offering amounts for the 82 qualified Regulation A offerings ranged from $100,000 to $5 million. Over one-third of these offerings were for $5 million. According to SEC data, the businesses intended to use the proceeds for purpose such as capitalization, debt repayment, research and development, and marketing and advertising. During this period, different types of businesses filed offerings that qualified for exemption under Regulation A—for example, a software database service company, industrial design company, senior assisted living facility, and financial services company. These businesses were either corporations or limited liability corporations that were located throughout the United States. In addition, about 24 percent of the qualified Regulation A offerings were associated with start-up businesses. Businesses have used Regulation D exemptions and registered initial public offerings to a greater extent than Regulation A in recent years. We summarize the trends for these types of offerings and provide comparison with Regulation A qualified filings in table 1. Regulation D: According to SEC data, there were over 15,500 initial Regulation D filings for up to $5 million in fiscal years 2010 and 2011. In comparison, there were 8 qualified initial Regulation A offerings during this period.