On March 25, 2015, the U.S. Securities and Exchange Commission (SEC) approved final rules, known as Regulation A+, in order to provide smaller companies with more options to access capital markets.
As required by the Jumpstart Our Business Startups (JOBS) Act, the SEC published its proposed Regulation A+ rules back in 2013 as a way to modify and update existing Regulation A. Regulation A is a longstanding exemption from federal registration requirements that allows public offers and sales of securities, but it is rarely used primarily because it does not preempt state registration requirements and it allows securities offerings only up to $5 million in a 12-month period. Securities exemptions are crucial to smaller companies because, without an available exemption, any offer or sale of securities must be registered with the SEC and applicable States (typically all States where investors reside) and, following registration, a company is subject to ongoing financial reporting obligations as well as numerous additional legal requirements.
Under the final Regulation A+ rules, there are two tiers of offerings: Tier 1 permits 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; and Tier 2 permits 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. Both tiers impose certain basic requirements as to issuer eligibility, disclosure, bad actor disqualification provisions and other requirements, which are largely based on current provisions of Regulation A. Unlike Tier 1 offerings, issuers in Tier 2 offerings are required to include audited financial statements in their offering documents and, following the offering, are required to file annual, semiannual and current reports with the SEC. These reports are significantly less extensive (in terms of the number of reports, their content and due dates) than the periodic reports required of SEC reporting companies. Also, unless the securities are listed on a national securities exchange, investors in Tier 2 offerings who do not qualify as "accredited investors" under Regulation D are limited to purchasing no more than 10% of the greater of their respective annual income or net worth (or of their respective annual revenue or net assets for entities). While Tier 2 offerings will preempt State registration requirements, Tier 1 offerings will continue to be subject to applicable State registration requirements but can benefit from the coordinated review program for Regulation A offerings developed last year by the association of State securities regulators, the North American Securities Administrators Association (NASAA). In order to help streamline the state registration and review process for Regulation A offerings, NASAA's coordinated review program includes an electronic filing depository for centralized filing and establishes procedures for unifying comments from the States and a definitive review timeline.
While the final Regulation A+ rules were unanimously approved by the SEC's five Commissioners, some of the SEC Commissioners noted certain aspects of the rules that could be improved. Also, while Congress specifically stipulated in the JOBS Act that securities offered under these new rules would be treated as "covered securities" for purposes of NSMIA (the National Securities Markets Improvement Act of 1996) (and would therefore preempt state registration requirements), NASAA has publicly criticized the final Regulation A+ rules for not "fully recognizing the significant benefits of [its coordinated review program]" and not “maintain[ing] the important investor protection role of state securities regulators” (presumably taking a jab at the provisions of Regulation A+ that preempt state registration requirements).
We will have to wait and see if Regulation A+ in fact makes the grade. In particular, it remains to be seen whether or not Regulation A+ will provide smaller companies access to the capital necessary to grow their business without unduly burdening them (both as to cost and time) with additional disclosure and reporting requirements. The final Regulation A+ rules will become effective 60 days after being published in the Federal Register. The final Regulation A+ rules require SEC Staff to undertake a study and submit a report to the SEC no later than five years after adoption of the rules on the impact of both Tier 1 and Tier 2 offerings on capital formation and investor protection. The adopting rule release notes that, based on information in that report, the SEC may propose to either decrease or increase the offering limit for Tier 1.