In response to a mandate by Congress under the JOBS Act, the SEC announced on March 25, 2015 the approval of rules to implement the new and supposedly improved securities registration exemption for offerings of up to $50 million in a 12-month period (the so-called “Reg A+” exemption). The newly expanded Reg A+ exemption will be available for use in 60 days from the date of the final rules publication in the Federal Register.
The newly expanded exemption is now divided into two tiers. Tier 1 exempts offerings of up to $20 million (an increase from the current $5 million cap) but such offerings are still subject to state registration requirements. Tier 2 is for offerings of up to $50 million. The reason for non-use of the current Regulation A exemption (for offerings of up to $5 million in a 12-month period) was, in large part, due to the requirement that such offerings needed to be registered in each state in which the securities were offered. Due to the time and expense required by the state registration requirements, issuers largely ignored the Reg. A exemption. Instead, in most cases, issuers conduct a non-public offering under Rule 506 of Regulation D of the Securities Act. State registration requirements are pre-empted by federal law for such offerings.
Supposedly, the Tier 1 offerings, although still subject to state registration requirements, will have a better go at it due to the states’ implementation of a new coordinated review program intended to streamline the state registration process. There is a lot of skepticism about the new state program and only time will tell if it results in an easier path for issuers to conduct a Reg A+ offering.
Apparently, state securities regulators are not pleased that Tier 2 Reg A offerings will not be subject to state securities registration requirements when all purchasers in such offerings are “qualified purchasers.” Such offerings are also subject to certain enhanced disclosure requirements including audited financial statements.
The JOBS Act included, among other things, the expansion of the Reg A exemption to help spur job growth through the liberalization of certain existing exemptions and the creation of others (i.e., the crowdfunding exemption). Congress believed at the time that the greater variety of exemptions and some decrease of certain requirements to qualify for the use of those exemptions would assist in generating capital by companies and lead to an increase in jobs creation by such issuers. Ongoing criticism by some members of Congress are targeted at the SEC’s slow process in implementing final rules to adopt fully the various mandates under the JOBS Act. Case in point is that the final rules for the new crowdfunding exemption have still not been finalized by the SEC. According to the SEC, those rules now have priority and should be implemented within the third calendar quarter of this year.
Whether issuers will utilize the new Reg A+ exemption depends in great part on whether the states can make registration under the Tier 1 exemption truly streamlined. Time will tell whether issuers will be even interested enough to “test the waters” of the Reg A+ exemption.