The Securities and Exchange Commission has significantly amended Regulation A to allow public offerings of up to $50m of securities in a 12-month period, increased from $5m in the current rules. Colloquially referred to as “Regulation A+,” the new regime builds on existing requirements and establishes a parallel universe of securities regulation which:
- is available to US and Canadian companies, including REITs, that are not already subject to Exchange Act reporting;
- requires the filing of a Regulation A offering statement with the SEC on EDGAR, subject to SEC review and “qualification” (effectiveness), but permits first-time filers to make confidential submissions so long as they are publicly filed 21 days before qualification;
- creates two tiers of eligible offerings, including Tier 1 offerings (up to $20m) and Tier 2 offerings (up to $50m);
- for Tier 2 offerings, requires inclusion in the offering statement of two years of audited financial statements prepared in accordance with US GAAS or PCAOB standards (Tier 1 offerings also require two years of financial statements but they can be unaudited);
- for Tier 2 offerings, requires ongoing public reporting obligations including annual reports on Form 1-K, semiannual reports on Form 1-SA and certain current reports on Form 1-U (all with reduced disclosure as compared to Forms 10-K, 10-Q or 8-K);
- allows sales to an unlimited number of investors, whether or not accredited, but for Tier 2 offerings limits the amount of securities that non-accredited investors can purchase to 10 percent of the greater of their annual income or net worth (for individuals) or 10 percent of the greater of their annual revenue or net assets at fiscal year end (for entities), unless the securities are listed on a national securities exchange;
- requires delivery of a preliminary offering circular at least 48 hours prior to sale (unless the issuer is subject to and current in its Tier 2 reporting obligations), and requires delivery of a final offering circular or notice with a URL up to two business days after the sale (an “access equals delivery” model);
- allows the use of “testing the waters” materials before or after filing the offering statement with the SEC; and
- for Tier 2 offerings, will not be subject to state securities law review.
Regulation A offerings have recently been relatively rare; from 2012 to 2014 only 26 Regulation A offerings were qualified by the SEC. While it is too early to tell whether issuers will take advantage of the new Regulation A, the increase in offering size limitations, state law preemption for Tier 2 offerings, the ability to sell to an unlimited number of investors (whether or not accredited), testing the waters capabilities, limited executive compensation disclosure requirements and free transferability of securities purchased mean that many companies may find Regulation A to be a viable capital markets alternative to a pure private placement or a full-fledged registered offering. However, the new rules do impose more obligations on issuers than those which had been in place for companies previously relying on Regulation A including, significantly, audited financial statements and ongoing reporting obligations for Tier 2 offerings.
The updated Regulation A was adopted on March 25, 2015 and becomes effective 60 days after the revised rules are published in the Federal Register.
Regulation A is available only to companies organized in and with their principal place of business in the United States or Canada. It is not available to non-Canadian foreign issuers. It is also not available to companies that are already subject to the ongoing reporting obligations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (i.e., companies that file Form 10-Ks and Form 10-Qs). While Regulation A is available to real estate investment trusts (REITs), it is not available to registered investment companies, business development companies (BDCs), blank check companies, issuers of fractional undivided interests in oil or gas rights or similar interests in other mineral rights, and certain categories of ineligible issuers. Significantly, the final rules do not limit issuer eligibility on the basis of issuer size.
Regulation A is available for equity securities, warrants, debt securities, and securities convertible or exchangeable into equity interests, as well as any guarantees of the foregoing. It is not available for asset backed securities.
Limitations on offering size
The revised Regulation A creates two tiers of offering exemptions: Tier 1, available for offerings up to $20m in a 12-month period; and Tier 2, available for offerings up to $50m in a 12-month period. Issuers conducting Regulation A offerings for less than $20m are free to choose between the requirements of either tier.
In calculating the offering size limitations, issuers must aggregate the price of all securities for which qualification is being sought, including the securities underlying any rights that are convertible, exercisable or exchangeable within one year after qualification or at the discretion of the issuer. If an offering includes rights to acquire other securities at a time more than one year after qualification and the issuer does not otherwise seek to qualify such underlying securities, then the aggregate offering price would not need to include the aggregate conversion, exercise or exchange price of the underlying securities. However, the underlying securities would need to be separately qualified under Regulation A or otherwise registered or subject to a registration exemption when issued.
Secondary sales by selling securityholders
Under both Tier 1 and Tier 2 offerings, at the time of an issuer’s first Regulation A offering and for 12 months following an issuer’s first Regulation A offering, secondary sales by selling securityholders (both affiliates and non-affiliates alike) are limited to no more than 30 percent of the aggregate offering price of a particular offering.
After the expiration of the first year after an issuer’s initial qualification, secondary sales by affiliates remain limited. For Tier 1 offerings, affiliates can sell no more than $6m over a 12-month period. In Tier 2 offerings, affiliates can sell no more than $15m over a 12-month period. Unlike the former Regulation A, the new rules do not prohibit affiliate resales if the issuer did not have net income from continuing operations in at least one of its last two fiscal years.
Secondary sales by non-affiliates made pursuant to a qualified offering statement following the expiration of the first year after an issuer’s initial qualification of an offering statement are not limited except for the overall Tier 1 or Tier 2 limitations.
There are no limits on the type of investors who can purchase securities in a Regulation A offering (e.g., the offering is not limited to “accredited investors” or “QIBs”). Further, in a Tier 1 offering, there are no limits on the amount of securities that an investor may purchase, and in a Tier 2 offering there is no limit on the amount of securities that an accredited investor can purchase.
However, in a Tier 2 offering, an unaccredited investor who is an individual can purchase no more than 10 percent of the greater of his/her annual income or his/her net worth, and an unaccredited investor which is an entity can purchase no more than 10 percent of the greater of the purchaser’s revenue or net assets (as of the purchaser’s most recent fiscal year end). The investment limitations in Tier 2 offerings do not apply to any purchasers if the securities are to be listed on a national securities exchange upon qualification at the consummation of the offering (as such companies will become subject to the Exchange Act periodic reporting requirements).
Issuers must notify investors of the investment limitations and may rely on a representation of compliance with the limitations from the investor (or from participating broker-dealers), unless the issuer knew at the time of sale that such representation was untrue. Investors do not need to disclose personal information to issuers in order to verify compliance.
Integration of offerings
Offerings made pursuant to Regulation A will not be integrated with (a) prior offers or sales of securities or (b) subsequent offers and sales of securities that are either (i) registered under the Securities Act of 1933, as amended (the “Securities Act”), except as provided below with respect to abandoned Regulation A offerings, (ii) made pursuant to Securities Act Rule 701 (an exemption from registration for offers and sales of securities to employees for compensatory purposes), (iii) made pursuant to an employee benefit plan, (iv) made pursuant to Regulation S (an exemption from registration for offers and sales outside of the United States), (v) made pursuant to Securities Act Section 4(a)(6) (an exemption for crowdfunding of up to $1m) or (vi) made more than six months after completion of a Regulation A offering.
In addition, where an issuer decides to register an offering under the Securities Act after soliciting interest in a contemplated but subsequently abandoned Regulation A offering, the abandoned Regulation A offering would not be subject to integration with the registered offering if the issuer engaged in solicitation only to QIBs and institutional accredited investors. If the issuer engaged in solicitation to persons other than QIBs and institutional accredited investors, an abandoned Regulation A offering would not be subject to integration if the issuer waits at least 30 days between the last such solicitation of interest in the abandoned Regulation A offering and the filing of the registration statement with the SEC.
Further, the SEC reiterated its guidance made in the context of Regulation D that an offering made in reliance on Regulation A will not be integrated with another exempt offering provided that each offering complies with the exemption being relied on for the particular offering. “For example, an issuer conducting a concurrent exempt offering for which general solicitation is not permitted will need to be satisfied that purchasers in that offering were not solicited by means of the offering made in reliance on Regulation A, including without limitation any ‘testing the waters’ communications. Alternatively, an issuer conducting a concurrent exempt offering for which general solicitation is permitted, for example, under Rule 506(c), could not include in any such general solicitation an advertisement of the terms of a Regulation A offering, unless that advertisement also included the necessary legends for, and otherwise complied with, Regulation A.”
Exchange Act Section 12(g)
Section 12(g) of the Exchange Act requires, among others, an issuer with total assets exceeding $10m and a class of equity securities held of record by either 2,000 persons, or 500 persons who are not accredited investors, to register such class of securities with the SEC and become subject to full Exchange Act reporting. An issuer which has conducted a Regulation A Tier 2 offering will be exempt from the provisions of Exchange Act Section 12(g), no matter how many shareholders the issuer has, so long as (i) the issuer remains subject to, and is current in, its Regulation A periodic reporting obligations as of its fiscal year end, (ii) the issuer engages the services of a transfer agent who is registered with the SEC and (iii) the issuer has a public float of less than $75m as of the last business day of its most recently completed semiannual period or, in the absence of a public float, annual revenues of less than $50m during its most recently completed fiscal year.
Exchange Act Section 12(g) registration will be required only if, on the last day of the fiscal year in which the company exceeded the public float or annual revenue threshold, the company has total assets of more than $10m and the class of equity is held by more than 2,000 persons or 500 persons who are not accredited investors. The company would be granted a two-year transition period before being required to register its class of securities pursuant to Section 12(g). Furthermore, the company would be considered an “emerging growth company” (“EGC”) when it becomes subject to Exchange Act reporting if it otherwise qualifies for such status.
SEC filing; offering statement requirements; electronic filing
Regulation A offering statements must be filed with the SEC through EDGAR and are subject to SEC review and qualification (e.g., effectiveness). There are no SEC filing fees associated with the Regulation A filing and qualification process. Regulation A offerings which involve broker dealers must also be filed and cleared through the Financial Industry Regulatory Authority (FINRA).
Issuers and participating broker-dealers that are not already subject to a Tier 2 reporting obligation must deliver a preliminary offering circular to prospective purchasers at least 48 hours in advance of sale. In addition, issuers and participating broker-dealers must provide purchasers, not later than two business days after completion of the sale, either a copy of the final offering circular or a notice that a sale occurred and a URL link to the final offering circular. Also, a final offering circular must accompany or precede any written communication that constitutes an offer in the post-qualification period.
The SEC adopted an “access equals delivery” approach for Regulation A offering circulars, similar to the process available for final prospectuses. When sales are made on the basis of offers that were conducted during the prequalification period using a preliminary offering circular, issuers and intermediaries can satisfy their final offering circular delivery requirement by filing the final offering circular on EDGAR. Issuers are, however, required to include a notice in any preliminary offering circular that will inform potential investors that the issuer may satisfy its delivery obligations for the final offering circular electronically. Similarly, for written confirmations and notices of allocation in the post-qualification period, issuers and intermediaries can rely on the EDGAR filing of the final offering circular to satisfy any delivery requirements that would otherwise apply.
Electronic-only offerings of Regulation A securities are permitted, similar to the process available under the Securities Act for SEC-registered offerings. An issuer and its participating intermediaries must obtain the consent of investors to the electronic delivery of the relevant Regulation A documentation.
Issuers can withdraw an offering statement with the SEC’s consent if none of the securities that are the subject of an offering have been sold and it is not the subject of an SEC order suspending a Regulation A exemption. Additionally, the SEC can declare an offering statement abandoned if it has been on file with the SEC for nine months without amendment and has not become qualified. These are similar to Securities Act provisions applicable to registration statements.
The SEC must declare offering statements qualified by a “notice of qualification” analogous to the “notice of effectiveness” in a registered offering.
Issuers who have not previously sold securities pursuant to a qualified offering statement under Regulation A or an effective registration statement under the Securities Act can initially submit an offering statement for non-public review by the SEC, similar to EGCs and some foreign private issuers. Similar to EGCs, the draft offering statement must be substantially complete upon submission to the SEC. The non-public offering statement, including any amendments thereto and the correspondence between the issuer and the SEC staff, must be publicly filed and available on EDGAR as exhibits to the offering statement not less than 21 calendar days before qualification of the offering statement (compared to 21 days before the roadshow commences which applies to registered offerings of EGCs).
With respect to other filings, similar to registered offerings, issuers can submit requests for confidential treatment under Rule 406 for information required to be filed and Rule 83 for information not required to be filed.
Form and content of Regulation A offering statements
Issuers seeking to rely on Regulation A must file and qualify an offering statement with the SEC. The offering statement is filed on Form 1-A and, as now amended, consists of three parts: Part I is a fill-in-the-blanks form capturing key information about the issuer and the offering; Part II contains the body of the disclosure document and the financial statements; and Part III contains the signatures, exhibits index and exhibits to the offering statement. As with a Form S-1, the Form 1-A must be signed by the issuer, its principal executive officer, principal financial officer, and principal accounting officer and a majority of the members of its board.
Part I of Form 1-A
Part I requires, among others, disclosure of certain information about the issuer (SIC code, EIN, number of employees, contact information, and location of principal executive office), summary information regarding the offering, including whether the issuer is conducting a Tier 1 or Tier 2 offering, the amount and type of securities offered, proposed sales by selling securityholders and affiliates, the type of offering (best efforts or continuous), estimated aggregate sales of any concurrent Regulation A offerings, anticipated fees, the names of advisors (auditors, lawyers and underwriters), the US or Canadian jurisdiction in which securities are to be offered and information about unregistered issuances or sales of securities within the last year. This information is filed on EDGAR but is not distributed to investors.
Part II of Form 1-A
Part II of Form 1-A is the “offering circular” and forms the core of the disclosure document. The offering circular disclosure includes:
- a cover page that identifies any underwriters and underwriting discounts and commissions;
- a table of contents;
- risk factors;
- information on dilution;
- a plan of distribution;
- selling securityholders;
- use of proceeds to the issuer (including whether a material amount of other funds are to be used in conjunction with the proceeds raised in the offering);
- a description of the business for the prior three years or since inception;
- a description of property;
- MD&A covering the two most recently completed fiscal years and any required interim periods (but omitting the disclosure of off-balance sheet arrangements and the table of contractual obligations that would be apply to an MD&A governed by Regulation S-K);
- identification of directors, executive offers and significant employees (with a discussion of family relationships, business experience during the past five years and involvement in certain legal proceedings during the past five years);
- group level executive compensation disclosure for the three highest-paid executive officers or directors and all directors as a collective group in the case of a Tier 1 offering and individual disclosure of the three highest-paid executive officers or directors in the case of a Tier 2 offering;
- disclosure of beneficial ownership of voting securities by executive officers, directors and 10 percent owners;
- related party transactions (for Tier 1 offerings, transactions in excess of $50,000 in the prior two years; for Tier 2 offerings, transactions during the prior two fiscal years that exceed the lesser of $120,000 or 1 percent of the average total assets at year end for the last two fiscal years);
- information about material terms of the offered securities;
- disclosure of the terms of all classes of outstanding capital stock; and
- “bad actor” disclosures.
Issuers that have not received revenue from operations during each of the last three fiscal years (or since inception) must also discuss their plan of operations for the 12 months following qualification of the offering circular, including a statement about whether the issuer anticipates that it will be necessary to raise additional funds within the next six months.
Issuers may alternatively follow the disclosure requirements of Part I of Form S-1 or Form S-11, including the scaled smaller reporting company disclosure if eligible. The final rules also include certain reduced disclosure for Tier 1 offerings.
Issuers can incorporate by reference into Part II of Form 1-A certain items previously submitted or filed on EDGAR (not limited to documents submitted or filed pursuant to Regulation A), so long as the offering circular also describes the information incorporated by reference and includes a separate hyperlink to the relevant document on EDGAR.
Financial statement requirements
For both Tier 1 and Tier 2 offerings, issuers must include balance sheets and statements of income, cash flows and stockholders’ equity as of or for the two most recently completed fiscal years (or such shorter time period as they may have been in existence). Financial statements for US-domiciled issuers must be prepared in accordance with US GAAP whereas Canadian issuers may prepare financial statements in accordance with either US GAAP or IFRS as issued by the IASB.
As a general matter, financial statements for issuers conducting Tier 1 offerings do not need to be prepared in accordance with Regulation S-X. On the other hand, issuers conducting Tier 2 offerings must generally follow the requirements of Article 8 of Regulation S-X, as if the issuer were a smaller reporting company. The financial statements do not need to be XBRL-tagged, initially or in future filings.
The financial statements included in offering statements for Tier 1 offerings need not be audited (and if so must be labeled as unaudited), unless the issuer has already obtained an audit of its financial statements, that audit was performed in accordance with US GAAS or the standards of the PCAOB and the auditor followed the independence standards of either Rule 2-01 of Regulation S-X or the independence standards of the AICPA.
In contrast, the financial statements included in Tier 2 offerings must be audited, either in accordance with US Generally Accepted Auditing Standards or the standards of the PCAOB. The auditor must be independent under Rule 2-01 of Regulation S-X but need not be PCAOB-registered. However, an issuer conducting a Regulation A offering that seeks to concurrently register its securities under the Exchange Act would be required to file audited financial statements that are prepared in accordance with the standards of the PCAOB by a PCAOB-registered auditor. This audit requirement is a significant change from existing Regulation A, which required financial statements to be audited only if the issuer otherwise had them available.
Similar to EGCs, issuers can delay the implementation of new accounting standards to the extent such standards provide for delayed implementation for non-public companies. If the issuer chooses to do so, it must disclose such choice at the time it files the offering statement and must apply this choice to all accounting standards.
Under the new rules, an offering statement will not be qualified if the date of the most recent balance sheet included is dated more than nine months before the date of qualification. This means:
- Filings made, or offering statements qualified, more than three months but no more than nine months after the end of the issuer’s most recently completed fiscal year end: must include a balance sheet as of the two most recently completed fiscal year ends (filings made in April 2015 through August 2015 would need financial statements as of December 31, 2014 and 2013 for calendar year filers).
- Filings made, or offering statements qualified, more than nine months after the end of the issuer’s most recently completed fiscal year end: must include a balance sheet dated as of the two most recently completed fiscal year ends, an interim balance sheet as of a date no earlier than six months after the end of the most recently completed fiscal year end and interim financial statements covering a period of at least six months (filings made in October 2015 would need financial statements as of June 30, 2015, December 31, 2014 and December 31, 2013 for calendar year filers).
- Filings made, or offering statements qualified, within three months after the most recent fiscal year end: must include a balance sheet as of the two fiscal year ends preceding the most recently completed fiscal year end and an interim balance sheet as of a date no earlier than six months after the date of the most recent fiscal year end balance sheet (filings made in January 2016 through March 2016 would need financial statements as of June 30, 2015, December 31, 2014 and December 31, 2013 for calendar year filers).
As in registered offerings, issuers in Regulation A offerings may also be required to file financial statements of businesses acquired or to be acquired (Rule 8-04 of Regulation S-X), pro forma financial information showing the effects of the acquisition (Rule 8-05 of Regulation S-X), financial statements of guarantors and issuers of guaranteed securities (Rule 3-10 of Regulation S-X) and financial statements of affiliates whose securities collateralize an issuance (Rule 3-16 of Regulation S-X).
Part III of Form 1-A (Exhibits)
Similar to registration statements, Part III of Form 1-A calls for the inclusion of exhibits with the offering statement. An issuer must include: an underwriting agreement; its charter and by-laws; instruments defining the rights of securityholders; subscription agreements; voting trust agreements; material contracts; plans of acquisition, reorganization, arrangement, liquidation or succession; escrow agreements; consents from experts; a legal opinion regarding legality; “testing the waters” materials, if any; the appointment of an agent for service of process, if necessary; and any additional exhibits that the issuer may wish to file.
Unlike the requirements for registered offerings, schedules to material contracts can be omitted if not material to an investment decision or if the material information in the schedules is disclosed otherwise in the agreement or the offering statement. Also, incorporation by reference to certain information that is already available on EDGAR is permitted (but the issuer would need to describe the information incorporated by reference and include a hyperlink to such exhibit on EDGAR).
Continuous or delayed offerings (shelf registration)
Regulation A allows the following types of continuous or delayed offerings (analogous to shelf registration for registered companies):
- securities that are part of an offering commencing within two calendar days after the qualification of the offering statement, which will be offered on a continuous basis, which may continue to be offered for a period in excess of 30 days from the date of initial qualification, and which will be offered in an amount that, at the time of qualification, is reasonably expected to be offered and sold within two years from the initial qualification date;
- securities offered or sold by or on behalf of selling securityholders;
- securities offered and sold pursuant to a dividend or interest reinvestment plan or an issuer employee benefit plan;
- securities issued upon the exercise of outstanding options, warrants, or rights;
- securities issued upon conversion of other outstanding securities; or
- securities pledged as collateral.
At-the-market offerings, by or on behalf of the issuer or otherwise, are not permitted under Regulation A. An “at-the-market” offering means an offering of equity securities into an existing trading market for outstanding shares of the same class at other than a fixed price.
The continuous or delayed offering statement must be amended and requalified annually to include updated financial statements and otherwise as necessary to reflect facts or events arising after qualification which, in the aggregate, represent a fundamental change in the information set forth in the offering statement.
Offering circular supplements
Offering circular supplements may be used for disclosing the final pricing information in an offering, where the offering statement is qualified on the basis of a bona fide price range estimate. The bona fide range may not exceed $2 for offerings where the upper end of the range is $10 or less and 20 percent if the upper end of the price range is over $10. Similar to registered offerings using Rule 430A, offering circulars may omit information with respect to the public offering price, underwriting syndicate, underwriting discounts, proceeds, conversion rates, call prices and other items dependent on the offering price, delivery dates and terms of the securities dependent on the offering date. However, the offering circular cannot omit the volume of securities to be offered at the time of qualification. Also, similar to Rule 430A for registered offerings, an offering circular supplement can reflect a decrease in the volume of securities or a change in the price range, so long as the decrease in volume or price range change would not materially change the disclosure at qualification, with a safe harbor for deviations up to 20 percent from the maximum aggregate offering price.
Similar to Rule 424 for registered offerings, omitted pricing information must be filed in an offering circular supplement no later than two business days following the earlier of the date of determination of the pricing information or the date of first use of the offering circular after qualification. Supplements which contain a substantive change from or addition to the information in the last offering circular filed must be filed no later than five business days after the date it is first used after qualification.
"Testing the waters"
Under the new Regulation A, issuers may “test the waters” for interest in an offering both before and after filing the offering statement, subject to the issuer’s compliance with the rules on filing and use of disclaimers and legends. There is no restriction as to the type of investors who can be approached (e.g., unlike rules applicable to EGCs, there is no limit to QIBs or institutional “accredited investors”).
Testing the waters materials that are used by an issuer or its intermediaries after the public filing of an offering statement must be accompanied by a preliminary offering circular or contain a notice informing investors where it can be obtained (this can be satisfied by providing the URL where the preliminary offering circular may be obtained). Solicitation materials used after publicly filing the offering statement must be redistributed to investors after filing to the extent either the material itself or the preliminary offering circular attached thereafter becomes inadequate or inaccurate in any material respect.
Testing the waters materials need not be submitted to the SEC at or before the time of first use. However, issuers must submit or file testing the waters materials as an exhibit when the offering statement is either submitted for non-public review or filed with the SEC. As a practical matter, solicitation materials used in a Regulation A offering will become publicly available as a matter of course.
The SEC also clarified that, similar to its position in registered offerings, “regularly released factual business communications” are not deemed to be soliciting material for purposes of Regulation A offerings. Factual business information means “information about the issuer, its business, financial condition, products, services, or advertisement of such products of services.” Factual business information “generally does not include such things as predictions, projections, forecasts, or opinions with respect to valuation of a security.”
Issuers conducting a Tier 1 offering are not subject to any ongoing reporting obligations. However, they are required to file a Form 1-Z no later than 30 calendar days after the termination or completion of the offering that discloses the date the offering was qualified and commenced, the amount of securities qualified, the amount of securities sold in the offering, the price of the securities, the portions of the offering that were sold on behalf of the issuer and any selling security holder, any fees associated with the offering and the net proceeds to the issuer. Issuers conducting Tier 2 offerings must also provide this information either on Form 1-Z or as part of their annual report on Form 1-K, whichever is first.
Issuers conducting Tier 2 offerings are required to file the following reports:
- Annual reports on Form 1-K. The annual report will include a fill-in-the-blanks form that includes certain basic information about the issuer, a disclosure portion, and two years of audited financial statements. The disclosure portion will include a description of the issuer’s business for the prior three fiscal years (or since inception if less); related party transactions; beneficial ownership of directors, officers and 10 percent holders; identities of directors and officers and a description of their business experience; executive compensation for the most recent year for the three highest-paid officers or directors; and MD&A for the two most recently completed fiscal years. The audited financial statements of US issuers must be prepared in accordance with US GAAP; Canadian issuers can use either US GAAP or IFRS as issued by the IASB. The audit must be conducted in accordance with either US GAAS or the standards of the PCAOB. The auditor of the financial statements must be independent under Rule 2-01 of Regulation S-X, but need not be PCAOB-registered. The annual report may require financial statements of guarantors and issuers of guaranteed securities (Rule 3-10 of Regulation S-X) or financial statements of affiliates whose securities collateralize an issuance (Rule 3-16 of Regulation S-X). Issuers can incorporate by reference certain information previously filed on EDGAR but must include a hyperlink to such material on EDGAR. The annual report must be signed by the issuer, its principal executive officer, principal financial officer and principal accounting officer, and a majority of its directors. The annual report must be filed within 120 calendar days after the issuer’s fiscal year end (compared to Form 10-Ks which must be filed within 90, 75 or 60 days of the year end by Exchange Act reporting issuers).
- Semiannual reports on Form 1-SA. The semiannual report consists primarily of financial information and MD&A. The financial statements do not need to be reviewed or audited and may be condensed. The financial statements will include an interim consolidated balance sheet as of the end of the six-month period covered by the report, a balance sheet as of the end of the preceding fiscal year, an interim statement of income for the six-month interim period and the corresponding period in the prior year, an interim statement of cash flows for the six-month interim period and the corresponding period in the prior year, and footnote disclosures as needed for fair presentation and to ensure that the financial statements are not misleading. Financial statements of guarantors and issuers of guaranteed securities must be included if required by Rule 3-10 of Regulation S-X. Unlike Form 10-Q, the semiannual report does not need to include disclosure about quantitative and qualitative market risk, controls and procedures, updates to risk factors, or defaults on senior securities. As in annual reports, incorporation by reference in semiannual reports is permitted. The semiannual report must be signed by the issuer and its principal executive officer, principal financial officer and principal accounting officer. The semiannual report must be filed within 90 days after the end of the first six months of the issuer’s fiscal year (compared to Form 10-Qs which must be filed within 40 or 45 days of the quarter end by Exchange Act reporting issuers).
- Current reports on Form 1-U. Current reports must be filed upon the occurrence of one of eight specified events: fundamental changes (“a fundamental change in the nature of an issuer’s business includes major and substantial changes in the issuer’s business or plan of operations or changes reasonably expected to result in such changes, such as significant acquisitions or dispositions, or the entry into, or termination of, a material definitive agreement that has or will result in major and substantial changes to the nature of an issuer’s business or plan of operations”), which the SEC clarified is a higher standard than “material” changes; bankruptcy or receivership; material modification to the rights of securityholders; changes in certifying accountants; non-reliance on previous financial statements or a related audit report or interim review; changes in control of the issuer; departure of the principal executive officer, principal financial officer or principal accounting officer; and unregistered sales of 10 percent or more of the outstanding equity securities. An acquisition will be deemed a “fundamental change” for this purpose only if the purchase price exceeds 50 percent of the total consolidated assets of the issuer as of the end of the most recently completed fiscal year (e.g., only one of the three “significance” prongs for acquisitions is considered fundamental for this purpose). Issuers who want to report more frequently than semiannually may file quarterly financial information on Form 1-U as well. As in annual and semiannual reports, incorporation by reference in current reports is permitted. The reports must be signed by an officer duly authorized to sign. Similar to the requirements of Form 8-K, current reports on Form 1-U must be filed within four business days after the occurrence of any of the triggering events.
- Exit report on Form 1-Z. This report is filed to provide notice of the suspension of ongoing reporting obligations.
An issuer’s ongoing reports filed under Tier 2 will satisfy the specified information about an issuer and its securities that a broker-dealer must review pursuant to Rule 15c2-11(a) of the Exchange Act before publishing a quotation for a security (or submitting a quotation for publication) in a quotation medium other than a national securities exchange.
However, an issuer’s Tier 2 ongoing reports will not satisfy the current information requirements of Rule 144 and Rule 144A, due to the absence of quarterly reporting. In the adopting release, the SEC stated that if the issuer voluntarily submitted quarterly financial statements on Form 1-U, such voluntarily provided quarterly financial information could satisfy the “reasonably current information” and “adequate current public information” requirements of Rule 144 and Rule 144A, respectively.
All of the Regulation A required reports must be submitted to the SEC through EDGAR.
Significant regulations applicable to Exchange Act reporting issuers but not to issuers who have conducted Regulation A offerings include:
- Section 16, which requires officers, directors and 10 percent shareholders to file ownership reports on Forms 3, 4 and 5;
- Section 13, which requires 5 percent shareholders to file beneficial ownership forms on Schedules 13D and 13G;
- Regulation FD, which regulates selective disclosure;
- Sections 302 or 906 of the Sarbanes-Oxley Act, which require CEO/CFO certifications;
- Section 404 of the Sarbanes-Oxley Act, which requires an annual internal controls report; and
- corporate governance requirements with respect to all-independent audit committees, independent compensation committees and codes of ethics.
Concurrent Exchange Act registration for certain Tier 2 offerings
Qualification of a Regulation A offering statement does not constitute registering a class of securities under Section 12 of the Exchange Act or filing a registration statement for purposes of Section 15(d) of the Exchange Act and, therefore, does not subject the Regulation A issuer to the Exchange Act reporting obligations.
Tier 2 issuers who wish to register a class of Regulation A securities under the Exchange Act may do so by filing a short-form Form 8-A so long as it is in conjunction with the qualification of a Form 1-A. However, only issuers that include the disclosure required by Part I of Form S-1 or Form S-11 in their offering circular will be permitted to use the short-form Form 8-A. Once the securities are registered under the Exchange Act, the issuer’s obligations to file ongoing reports under Regulation A will be suspended as the issuer will be subject to Exchange Act reporting obligations. An issuer entering Exchange Act reporting under a qualified Regulation A offering statement and Form 8-A will be considered an EGC to the extent the issuer otherwise qualifies for such status.
Termination or suspension of Tier 2 disclosure obligations
Tier 2 issuers that have filed all reports required by Regulation A (for the shorter of the period since they became subject to such reporting obligations or its most recent three fiscal years and the portion of the current year) will be permitted to suspend their Regulation A ongoing reporting obligations by filing an exit report on Form 1-Z if the securities of each class to which the offering statement relates are held of record by fewer than 300 persons and offers or sales made in reliance on a qualified Tier 2 offering statement are not ongoing.
Relationship with state Blue Sky laws
Tier 1 offerings remain subject to state securities law requirements. The North American Securities Administrators Association (“NASAA”) has recently introduced a state coordinated review program that may be useful to Tier 1 issuers in navigating the state review process.
Tier 2 offerings are exempt from state securities law requirements.
In both cases states still retain the power to bring enforcement actions with respect to fraudulent securities transactions, to require issuers to file with the states any document filed with the SEC solely for notice purposes and assessment of fees, and to enforce the filing and fee requirements by suspending the offer and sale of securities within a given state.
Bad actor disqualifications
The new Regulation A rules disqualify “bad actors” from using Regulation A. The covered persons and triggering events in the final rules for Regulation A are substantially similar to those contained in Rule 506 of Regulation D. Covered persons include managing members of LLC’s, compensated solicitors of investors, underwriters, executive officers and other officers participating in the offering, and beneficial owners of 20 percent or more of the issuer’s outstanding voting equity securities (“only those voting equity securities which, by their terms, currently entitle the holder to vote for the election of directors”).
A failure to comply with a term, condition or requirement of Regulation A will not result in the loss of the exemption for any offer or sale to a particular entity so long as the failure to comply was “insignificant” to the offering as a whole. Any failure to comply with the offering limitations, issuer eligibility criteria or requirements for offers or continuous or delayed offerings will be deemed to be significant to the offering as a whole.
Securities Act liability
Regulation A offerings, whether Tier 1 or Tier 2, are subject to Securities Act Section 12(a)(2) liability, which expressly applies to any person offering or selling Regulation A securities, and the antifraud provisions of Section 17 of the Securities Act, which applies to any person who commits fraud in connection with the offer or sale of securities.
Principal elements of Regulation A
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