On March 25, 2015, the Securities and Exchange Commission (SEC) adopted final rules intended to facilitate smaller companies’ access to capital and to provide investors with more investment choices. The final rules became effective on June 19, 2015. The new rules update an existing exemption known as Regulation A. The SEC was mandated to create these rules by Title IV of the Jumpstart Our Business Startups (JOBS) Act, and the updated exemption is often referred to as Regulation A+.
History of Regulation A
Regulation A is a longstanding exemption from registration that permits unregistered public offerings of up to $5 million of securities in any 12-month period (with no more than $1.5 million being offered by existing owners of the company). The Regulation A disclosure document, which required SEC review, combined with the requirement to have separate state law qualification made the Regulation A exemption burdensome in comparison to other available exemptions and cost prohibitive in relation to the amount that could be raised. For these reasons the prior Regulation A was rarely used, even though the stock issued under the exemption is not “restricted stock” and is freely tradable by non-affiliates of the issuer.
Under the new rules, most private companies can offer and sell up to $50 million of securities in a 12-month period, subject to certain eligibility, disclosure and reporting requirements. Companies using Regulation A+ can advertise the offering, and anyone can invest subject to certain dollar amount limitations for non-accredited investors.
The final rules provide two tiers of offerings:
- Tier 1 – securities offerings 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.
- Tier 2 – securities offerings 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.
The rules further limit secondary sales by affiliates to no more than 30% of an initial Regulation A+ offering, including subsequent Regulation A+ offerings made in the first 12 months following the initial offering.
The rules provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers,” defined to be any person to whom securities are offered or sold under a Tier 2 offering. For amounts up to $20 million, companies are able to choose whether to conduct a Tier 1 or Tier 2 offering.
Both tiers are subject to basic requirements as to issuer eligibility and disclosure that arise from the prior Regulation A provisions. In addition both tiers will now permit companies to submit draft offering statements for confidential review by the SEC staff before filing, permit continued use of solicitation materials after filing the offering statement, require electronic filing, and otherwise align Regulation A+ with current practices for registered offerings.
Even with preemption of state law, States will retain their full anti-fraud powers and may require issuers using Regulation A+ to file their offering documents with the State.
Regulation A+ is like a mini-IPO market for private companies to offer their shares publicly without the full SEC registration and reporting burdens. However, Regulation A+ has some compliance obligations, including an offering statement that is subject to SEC review and comment, audited financial statements, and semi-annual reporting obligations for offerings greater than $20 million. Given its recent effective date, whether the changes to Regulation A will be sufficient to entice companies to begin using it to raise capital is still an open issue. Although a few examples of companies that may want to use the Regulation A+ exemption include:
- Closely held companies that are profitable and have steady growth.
- Closely held companies with owners who want liquidity and do not want to sell the company or give up control to private equity investors.
- Real estate developers looking for funding alternatives from traditional loans (or interested in soliciting investment from those in the community).