HIGHLIGHTS:

  • The SEC adopted final rules on March 25, 2015, that will greatly facilitate the ability of private (i.e., non-SEC reporting) financial institutions and other companies to access the capital markets and issue non-restricted, freely transferable debt and equity securities (including warrants and convertible securities).
  • The new rules implement a provision in the JOBS Act that directed the SEC to adopt rules which would exempt from the registration requirements of the Securities Act offerings of up to $50 million of securities annually.

On March 25, 2015, the U.S. Securities and Exchange Commission (SEC) adopted final rules that will greatly facilitate the ability of private (i.e., non-SEC reporting) financial institutions and other companies to access the capital markets and issue non-restricted, freely transferable debt and equity securities (including warrants and convertible securities). The rules implement a provision in the Jumpstart Our Business Startups (JOBS) Act that directed the SEC to adopt rules which would exempt from the registration requirements of the Securities Act offerings of up to $50 million of securities annually. There are a number of financial institutions around the country that have indicated strong interest in being able to raise capital to buttress lending and other business opportunities available in their markets, but having to undertake all of the burdens associated with becoming a public reporting company has been viewed as too burdensome to justify the undertaking.

The new rules, which amend existing Regulation A and are being referred to as "Regulation A+," provide financial institutions and other businesses with the ability to raise capital while still providing flexibility in assessing and selecting the types of ongoing public reporting responsibilities the issuer is willing to undertake as part of the process. In general, the final rules create an exemption for U.S. and Canadian companies that are not required to file reports under the Securities and Exchange Act (Exchange Act). The rules create a two-tiered structure that is based on the size of the proposed offering, each of which has different requirements for the issuer.

  • Tier 1 permits securities offerings of up to $20 million in a 12-month period, with not more than $6 million being offered by selling security holders that are affiliates of the issuer. 1
  • Tier 2 permits securities offerings of up to $50 million in a 12-month period, with not more than $15 million being offered by selling security holders that are affiliates of the issuer.

For offerings of up to $20 million, the issuer will have the opportunity to elect whether to proceed under Tier 1 or Tier 2. Both tiers are subject to basic requirements as to eligibility, disclosure and other matters discussed in this alert that are derived from Regulation A. However, in addition to the basic requirements, companies that conduct either a Tier 1 or Tier 2 offering would be subject to additional requirements (described below).

Requirements Applicable to Tier 1 and Tier 2 Offerings

The following requirements apply to Regulation A+ offerings – regardless of whether they constitute Tier 1 or Tier 2 offerings:

  • Regulation A+ is available to U.S. and Canadian issuers that are not SEC-reporting companies, blank check companies or investment companies registered under the Investment Company Act of 1940.
  • Issuers may offer debt and equity securities, including warrants and convertible securities, under a Regulation A+ offering. Asset-backed securities are expressly excluded from Regulation A+ offerings.
  • Issuers are permitted to engage in "testing the waters" communications both before and after a required offering statement is filed with the SEC. This is similar to the "testing the waters" communications permitted for "emerging growth companies" under the JOBS Act, except Regulation A+ issuers may communicate with all potential investors – not just institutional accredited investors and qualified institutional buyers.
  • Securities issued pursuant to a Regulation A+ offering are not "restricted securities" and are thus freely transferrable by non-insiders.
  • Issuers must file an offering statement with the SEC, which must then be "qualified." An offering statement is a scaled-down version of a prospectus, which is a disclosure document that provides potential investors with information that will form the basis for their investment decision. The "qualification process" is similar to a declaration of effectiveness for a registered offering.
  • Securities offered by selling shareholders cannot exceed 30 percent of the aggregate offering.
  • Issuers are permitted to use Regulation A+ to engage in continuous or delayed offerings for, among other things, offerings for employee benefit plans and offerings by selling shareholders.
  • Issuers meeting the "bad actor" provisions of Rule 262 are prohibited from relying on the Regulation A+ exemption.
  • Regulation A+ issuers must file an "exit report" within 30 days of the completion or termination of a Regulation A+ offering.

Tier 1 Offerings

In addition to the requirements noted above, Tier 1 offerings under Regulation A+ are subject to the following requirements:

  • Issuers are limited to an aggregate offering of $20 million over a 12-month period and there are no investment limitations on purchasers.
  • Tier 1 offerings are not exempted from Section 12(g) of the Exchange Act, which requires that issuers with total assets exceeding $10 million register a class of securities with the SEC if such securities are held of record by either: (i) 2,000 persons or (ii) 500 persons who are not accredited investors.
  • In addition to complying with blue sky laws regarding filing and anti-fraud, Tier 1 offerings must comply with the new coordinated review process for solicitation materials that is administered by the North American Securities Administrators Association (NASAA).
  • Unless an issuer already has audited financial statements, issuers of Tier 1 offerings are not required to include audited financial statements in their offering statement.

Tier 2 Offerings

In addition to the requirements noted above, Tier 2 offerings under Regulation A+ are subject to the following requirements:

  • Issuers are limited to an aggregate offering of $50 million over a 12-month period.
  • Non-accredited investors are limited to investing 10 percent of the greater of their: (i) annual income or (ii) net worth. This investment limitation will not apply if the securities are to be listed on a national securities exchange upon consummation of the offering.
  • Tier 2 offerings subject issuers to periodic reporting requirements that are a scaled-down version of the annual, quarterly and ongoing reporting requirements that Exchange Act reporting companies are subject to. Tier 2 issuers are required to file annual reports, semiannual reports and current reports, which are less comprehensive than a Form 10-K, Form 10-Q or Form 8-K, respectively.
  • Tier 2 offerings are exempt from blue sky requirements, as purchasers of Tier 2 securities are considered "qualified purchasers" and thus, applicable blue sky laws are preempted by federal securities law.
  • Unlike Tier 1 offerings, Tier 2 offerings are exempt from Section 12(g) of the Exchange Act, provided that the issuer meets several conditions.2
  • Offering statements for Tier 2 offerings must include audited financial statements.