SEC Finalizes Regulation A+; Raises Cap on Certain Reg A Offerings
Regulation A allows private companies to raise capital through an abbreviated, “mini-registration” process with the Securities and Exchange Commission (the “SEC”), which permits solicitation of both accredited and non-accredited investors and the ability to issue shares which are freely tradable. Regulation A permits, as its traditional advantages, (i) reduced disclosures to investors relative to a full SEC registration, (ii) limited SEC review, (iii) the ability to “test the waters” with investors prior to incurring significant upfront costs such as filing of an offering memorandum with the SEC, (iv) the ability of an investor to receive free trading shares upon their issuance, and (iv) in certain circumstances as further described below, the absence of post-offering reporting requirements unless and until a company meets the threshold reporting requirements applicable to all companies under the Securities Exchange Act of 1934.
In April of 2012, President Obama signed legislation creating the “Jumpstart Our Business Start-Ups Act”, otherwise known as the “JOBS Act”. The Jobs Act sought to alleviate regulatory burdens and facilitate investment in several significant ways, including requiring the SEC to expand the permitted aggregate sale, in any 12-month period under Regulation A, from $5 million to $50 million, with certain additional reporting requirements.
On March 25, 2015, the SEC adopted final rules related to the changes to Regulation A required by the Jobs Act.
The final rules, often referred to as Regulation A+, provide for two tiers of offerings:
- Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and
- Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements.
Regulation A+ offering will be available to companies organized and with their principal place of business in either the United States or Canada.
The exemption will not be available to companies who:
- are already SEC reporting Companies;
- have no specific business plan or purpose;
- have indicated their business plan is to engage in merger or acquisition with an unidentified company;
- are seeking to offer and sell asset-back securities or fractional undivided interests in oil, gas or other mineral rights;
- have been subject to any order of the SEC under Exchange Act Section 12(j) entered within the past five years;
- have not filed ongoing reports required by the rules during the preceding two years; or
- are disqualified under the “bad actor” disqualification rules.
For offerings of up to $20 million, the issuer could elect whether to proceed under Tier 1 or Tier 2. Both tiers would be subject to basic requirements as to issuer eligibility, disclosure, and other matters, drawn from the current provisions of Regulation A. Both tiers would also permit companies to submit draft offering statements for non‑public review by SEC staff before filing, permit the continued use of solicitation materials after filing the offering statement, require the electronic filing of offering materials and otherwise align Regulation A with current practice for registered offerings.
In addition to the limits on secondary sales by affiliates, the rules also limit sales by all selling security-holders to no more than 30 percent of a particular offering in the issuer’s initial Regulation A offering and subsequent Regulation A offerings for the first 12 months following the initial offering.
In addition non-accredited investors are limited in what they can purchase in a Tier 2 offering to no more than 10 percent of the greater of the investor’s annual income or net worth.
Tier 1 and Tier 2 issuers must file balance sheets and related financial statements for the two previous fiscal year ends (or for such shorter time that they have been in existence). Tier 1 and Tier 2 issuers must include financial statements that are dated not more than nine months before the date of non-public submission, filing, or qualification, with the most recent annual or interim balance sheet not older than nine months. If interim financial statements are required, they must cover a period of at least six months.
Tier 1 issuers must provide information about sales in such offerings and to update certain issuer information by electronically filing a Form 1-Z exit report with the SEC not later than 30 calendar days after termination or completion of an offering.
In addition to these basic requirements, companies conducting Tier 2 offerings would also have to file:
- audited financial statements.
- annual, semiannual and current event reports.
State Securities "Blue Sky" Laws
The final rules preempt state “Blue Sky” laws in Regulation A+ offerings if such securities are (i) “offered or sold on a national securities exchange” or (ii) “offered or sold to a qualified purchaser”. It should be noted that the national securities exchange exemption does not apply to those securities traded on certain bulletin boards such as those on the OTC Markets. The final rules provide that the definition of “qualified purchaser” shall include any person to whom securities are offered or sold to in a Regulation A+ Tier 2 offering. Effectively, this preempts state securities laws as it relates to Tier 2 offerings. The final definition of “qualified purchaser” does not include offerees in Tier 1 offerings, thus subjecting Tier 1 offerings to state securities laws, unless it satisfies another exemption. The SEC notes that such Tier 1 offerees may avail themselves of the coordinated review program developed by the North American Securities Administrators Association (NASAA) for Regulation A offerings as it relates to state securities laws.
States also retain authority to:
- investigate and bring enforcement actions with respect to fraudulent transactions;
- require the filing of any documents filed with the SEC “solely for notice purposes and the assessment of any fee;” and
- enforce filing and fee requirements by suspending offerings within a given state.
Offering statements must be qualified by the SEC before sales may be made pursuant to Regulation A. Regulation A+ permits the offering statements to be declared qualified by a “notice of qualification” issued by the Division of Corporation Finance, rather than requiring the SEC itself to issue an order. The notice of qualification is analogous to a notice of effectiveness in registered offerings.
The final rule incorporates a confidential submission process, similar to that available to Emerging Growth Companies relying on the JOBS Act, as well as the use of test-the-waters communications.
In addition, the final rule provides for a Tier 2 issuer to concurrently file a short-form Form 8-A to register a class of securities under Exchange Act Section 12(g) or 12(b)—this means that a Tier 2 issuer will, if it chooses to do so, be able to conduct a Regulation A+ offering and list on a national securities exchange, provided it satisfies the listing requirements of the exchange.