On March 25, 2015, the SEC adopted new rules that build upon current Regulation A, an exemption from registration for small securities offerings. The revised exemption, mandated by the Jumpstart Our Business Startup (JOBS) Act and commonly referred to as “Regulation A+,” expands Regulation A to enable companies to offer and sell up to $50 million of securities within a 12-month period, compared to just $5 million under the prior rules. We expect the new rules to become effective in June 2015. The key question is whether Regulation A+ will effectively bridge the gap between (a) private offerings under Rule 506 of Regulation D and (b) smaller IPOs by issuers that will become SEC-reporting companies with shares listed on a national exchange.  In our “Questions and Answers” section below, we examine some of the factors that will determine whether the new rules will revitalize Regulation A or leave it as a niche exemption on which issuers rarely rely.

OVERVIEW

The SEC amended Regulation A at Congress’ direction to expand and update the exemption for small issues to make it more useful to small companies. Given the $5 million cap and lack of state preemption in the prior rule, issuers rarely used Regulation A. By adopting Regulation A+, the SEC expanded and revised Regulation A to permit two tiers of offerings:

  • Tier 1, for offerings of up to $20 million in a 12-month period, and
  • Tier 2, for offerings of up to $50 million in a 12-month period.

Both Tiers are subject to basic requirements regarding issuer eligibility, disclosure and other matters. The proposals for offerings under Tier 1 and Tier 2 build on current Regulation A, and preserve, with some modifications, existing provisions of Regulation A regarding issuer eligibility, offering circular contents, testing the waters and “bad actor” disqualification. Tier 2 offerings will be subject to additional requirements, including the provision of audited financial statements, ongoing reporting obligations (annual, semi-annual and current reports) and certain purchaser limitations on investments.

The remaining sections of this Client Alert are:

  • “Highlights,” in which we summarize some of the most important aspects of Regulation A+;
  • “Questions and Answers,” in which we address some of the critical points that will determine the usefulness of Regulation A+ in the overall capital raising process; and
  • “Summary of Key Provisions,” in which in which we summarize the new rules in more detail.

HIGHLIGHTS

We believe the most significant aspects of Regulation A+ are:

  • Maximum Offering Amount Increased from $5 Million to $50 Million. Under the new two-tier system, the maximum offering amount in a 12-month period is $20 million for Tier 1 offerings and $50 million for Tier 2 offerings.
  • Securities Sold under Regulation A+ Are Not “Restricted.” Securities sold under Regulation A+ are not considered “restricted securities” under the Securities Act and thus are not subject to transfer restrictions (except for shares that are acquired by an affiliate of the issuer and so become “control securities”).
  • Number of Investors is Not Limited.  In contrast to Rule 506 of Regulation D, companies relying on amended Regulation A can sell securities to an unlimited number of non-accredited investors, although non-accredited investors in Tier 2 offerings will be subject to an investment limitation as noted below. 
  • State Securities Law Preemption for Tier 2 Offerings. The final rules provide for the preemption of state securities laws’ registration and qualification requirements for Tier 2 offerings, but not Tier 1 offerings.
  • Ongoing Reporting Obligations for Tier 2 Issuers. Currently, Regulation A issuers do not have ongoing reporting obligations. The final rules require Tier 2 issuers to file annual, semiannual and current event reports.
  • Audited Financial Statements for Tier 2 Issuers. Issuers in Tier 2 offerings will be required to include audited financial statements in their offering documents and to include audited financial statements in their annual reports.
  • Limitation on Amount that a Non-accredited Investor Can Invest in a Tier 2 Offering. A non-accredited investor may purchase in a Tier 2 offering no more than 10% of the greater of (a) the investor’s annual income and (b) the investor’s net worth.  This limit will not apply to purchases of securities that will be listed on a national securities exchange upon qualification.

QUESTIONS AND ANSWERS

How the following questions and others are ultimately answered will determine whether Regulation A+ will facilitate the capital-raising process as Congress and the SEC intend.

  • Will issuers in Tier 2 offerings find reputable underwriters to identify investors and facilitate a successful distribution?

We believe an issuer that can raise $20 to $50 million through the contacts of its management and directors will be more likely to use Rule 506 than Regulation A+.  An issuer that cannot reasonably expect to raise capital by using Rule 506 is a candidate for Regulation A+, but in our view this route will be successful only with the help of a qualified, reputable underwriter.  We note the general trend over the past 15 years towards larger IPOs by bigger companies underwritten by national or international investment banks, coupled with the failure or absorption of many of the regional or industry-focused investment banks that led smaller IPOs in the late 90’s. Given this background, will reputable underwriters address the new Regulation A+ market, particularly Tier 2? (The SEC provides a thoughtful analysis of this and related concerns in its economic analysis beginning on page 237 of the adopting release.) We see a good opportunity for middle market and even smaller investment banks here.

  • Will NASAA’s coordinated review program work for Tier 1 offerings?

In the adopting release, the SEC noted that it remained “concerned that costs associated with state securities law compliance, even under a coordinated review program [recently adopted by NASAA], may deter issuers from using amended Regulation A, which could significantly limit the impact of the exemption as a tool for capital formation.” Adopting release, p. 224. We share these concerns regarding Tier 1 offerings. We believe that the burden of state regulation for smaller Regulation A+ offerings, compared to the well-established path of raising capital through Rule 506 in offerings of this size made solely to accredited investors, will mean that Tier 1 offerings will be relatively rare.  If, over time, (a) the coordinated review program is perceived as being timely and fair and (b) the SEC processes Regulation A+ offerings promptly (see below), then Tier 1 offerings will be much more likely to become a viable path for small issuer capital raising.

  • Will the SEC speed up its processing of Regulation A+ offerings? 

In the adopting release, the SEC reported that from “2002 through 2011, Regulation A filings took an average of 228 days to qualify” and that “[a]verage time to qualification exceeded 300 days in 2012-2014 [yikes!],” albeit with very few offerings. Adopting release, p. 252. Smaller issuers are almost always in a hurry to raise capital.  As securities lawyers advising them, we are troubled by this history of very long qualification times, particularly for issuers in Tier 1 offerings who must also navigate the state regulatory process. We predict that adoption of Regulation A+ will proceed slowly until securities lawyers gain some sense of how long and how painful the qualification process will be.

  • Will issuers regard the creation of a “broad investor base in Tier 1 offerings” as a feature or a bug?

In the adopting release, the SEC states that it believes “that provisions such as the initial and periodic disclosure requirements and the investment limit in Tier 2 offerings appropriately balance investor protections and issuer compliance costs while facilitating the creation of a broad investor base in Tier 2 offerings for small issuers.”  Adopting release, p. 289. We believe that the great majority of investors in Tier 2 offerings are likely to be individuals and not institutional investors. As we and others have observed in criticism of the proposed crowdfunding rules, having a substantial number of individual investors can be a mixed blessing for a small, growing company. We suspect that issuers that can raise institutional money at this stage will continue to do so, which may lead to a perception that issuers who use Regulation A+ are somehow less worthy. We hope that having another viable option for capital raising will be helpful to some issuers.

  • Do the advantages of a Tier 2 offering outweigh the ongoing SEC reporting requirements triggered by that offering?

Although the ongoing reporting requirements for Tier 2 issuers are less detailed than those required for a reporting company under the Exchange Act, they impose ongoing costs and potential liability that issuers who rely on Rule 506 or Tier 1 will not have to bear. The SEC explains it this way: 

Based on the scope of disclosures required, an issuer’s combination of direct and indirect costs of disclosure is likely to be lowest for a Regulation D Rule 506 offering, followed by a Tier 1 offering, a Tier 2 offering and, finally, a registered public offering.” Adopting release, p. 306.

Each issuer that considers a Tier 2 offering will have to examine carefully whether the benefits of a Tier 2 offering outweigh the costs of ongoing reporting.  That analysis must take into consideration, among other things, the SEC’s conditional exemption from mandatory registration of a class of securities under Section 12(g) of the Exchange Act, which exemption is included in the new Regulation A+ rules.

  • Will investors invest in Regulation A+ offerings if the shares are not listed on a national stock exchange to facilitate trading in the stock?

National stock exchanges generally require companies whose shares are listed to file reports with the SEC under the Exchange Act.  The new rules under Regulation A+ do offer a path to enter Exchange Act reporting for issuers who wish to list their shares and meet the other listing requirements of the exchange. Issuers who do not follow that route will be unable to list their shares on a national stock exchange. For some investors, the lack of stock exchange listing will rule out investing in Regulation A+ offerings.

SUMMARY OF KEY PROVISIONS

Offering Limitations and Secondary Sales

As noted above, the new rules create two tiers of offerings: Tier 1, for offerings of up to $20 million of securities in a 12-month period; and Tier 2, for offerings of up to $50 million of securities in a 12-month period. The SEC believes that issuers raising smaller amounts of capital may benefit from a tiered system with two options for raising capital based on differing disclosure and other requirements.

In addition to the dollar limits on issuer sales, the final rules limit the amount of securities that selling shareholders can sell at the time of an issuer’s first Regulation A offering and within the following 12 months to no more than 30% of the aggregate offering price of a particular offering. For example, selling shareholders in a Tier 1 offering can sell no more than $6 million of securities, and selling shareholders in a Tier 2 offering can sell no more than $15 million of securities. Sales by selling shareholders under either Tier would be aggregated with sales of Regulation A securities by the issuer and other selling shareholders for purposes of calculating the maximum permissible amount of securities that may be sold during any 12-month period.

Further, the SEC provided different requirements for secondary sales by affiliates and by non-affiliates.  The final rules limit secondary sales by affiliates that occur following the expiration of the first year after an issuer’s initial qualification of an offering statement to no more than $6 million, for Tier 1 offerings, and $15 million, for Tier 2 offerings, in each case over a 12-month period.

Investment Limitation

Before the adoption of Regulation A+, the amount of securities an investor could purchase in a qualified Regulation A offering was not limited. Under the final rules, the amount of securities that non-accredited investors can purchase in a Tier 2 offering is limited to no more than 10% of the greater of their annual income and their net worth. Furthermore, the SEC determined that this limitation is not necessary for accredited and non-accredited investors alike where the securities will be listed on a national securities exchange because of issuer listing requirements and the liquidity that exchanges provide to investors. This limitation was an important consideration in the justification of Blue Sky preemption.

Under the final rules, issuers are required to make investors aware of the investment limitations but are otherwise able to rely on an investor’s representation of compliance with the proposed investment limitation unless the issuer knows, at the time of sale, that those representations are untrue.

Relationship with State Securities Law

Before the adoption of Regulation A+, issuers conducting Regulation A offerings were required to comply with state securities laws in each state in which the offering was conducted. Comments received by the SEC and a JOBS Act-mandated Government Accounting Office report identified the costs of state securities law compliance as a significant obstacle to the use of Regulation A and an impediment that would discourage market participants from using the proposed Regulation A exemptions.

The JOBS Act addressed the issue of a varied state-level regulatory scheme by providing state law preemption for certain Regulation A issuers. The JOBS Act added Section 18(b)(4)(D) to the Securities Act, which included Section 3(b)(2) offerings that are (a) listed on national securities exchanges or (b) made to “qualified purchasers” in the category of covered securities that are exempt from state regulation.

The SEC expects that many Regulation A issuers will not meet the standards for listing on a national securities exchange, leaving this prong of the exemption with limited effect. To facilitate state law preemption and encourage the use of Regulation A as a tool for capital formation, the SEC has broadened the definition of “qualified purchaser” in the final rules to mean “any person to whom securities are offered or sold pursuant to a Tier 2 offering.” Tier 1 offerings will remain subject to federal and state law registration and qualification requirements.

Eligible Issuers

The SEC adopted the rules regarding issuer eligibility as proposed. Before the amendment, use of Regulation A was limited to companies organized in and with their principal place of business inside the United States or Canada. It was unavailable to:

  • reporting companies under the Securities Exchange Act of 1934;
  • investment companies under the Investment Company Act of 1940 and Business Development Companies;
  • blank check companies; and
  • issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights.

The final rule adds additional categories of ineligible issuers, but otherwise keeps the present rule intact. The additional ineligible issuers are:

  • certain issuers disqualified from participation under the “bad actor” provisions of Rule 262 under the Securities Act;
  • issuers that have not filed with the SEC the ongoing reports required by the rules during the two years immediately preceding the filing of a new offering statement (or for such shorter period that the issuer was required to file such reports); and
  • issuers that are or have been subject to an order by the SEC denying, suspending, or revoking the registration of a class of securities pursuant to Section 12(j) of the Exchange Act that was entered within five years before the filing of the offering statement.

Eligible Securities

The final rules limit the types of securities for sale under Regulation A to the specifically enumerated list in Section 3(b)(3), i.e., “equity securities, debt securities, and debt securities convertible or exchangeable to equity interests, including any guarantees of such securities,” which includes warrants. The SEC specifically excluded asset-backed securities. 

Integration

Under the final rules, offerings pursuant to Regulation A will not be integrated with prior offers or sales of securities or subsequent offers and sales of securities that are:

  • registered under the Securities Act, except as provided in Rule 255(c);
  • made pursuant to Rule 701 under the Securities Act;
  • made pursuant to an employee benefit plan;
  • made pursuant to Regulation S;
  • made pursuant to Section 4(a)(6) of the Securities Act; or
  • made more than six months after completion of the Regulation A offering.

The SEC clarified that where an issuer abandons a contemplated Regulation A offering before qualification, but after soliciting interest in the offering to persons other than QIBs and institutional accredited investors, waiting less than 30 calendar days before a subsequent registered offering would not necessarily result in integration and would instead depend on the particular facts and circumstances.  The SEC also confirmed its previously stated position that an offering made in reliance on Regulation A should not be integrated with another exempt offering made by the issuer, provided that each offering complies with the requirements of the exemption that is being relied upon for the particular offering.

Treatment under Section 12(g) of the Exchange Act

Unlike the guidance provided in the crowdfunding legislation, Title IV of the JOBS Act does not address how Regulation A issuers should be treated under Section 12(g) of the Exchange Act, which requires companies to register under the Exchange Act where total assets exceed $10,000,000 and a class of their equity securities (other than an exempted security) is held of record by either: (a) 2,000 persons, or (b) 500 persons who are non-accredited investors.

The new rules exempt Regulation A securities issued under Tier 2 from the requirements of Section 12(g), so long as the issuer:

  • remains subject to, and is current in, its Regulation A periodic reporting obligations,
  • engages the services of a transfer agent pursuant to Section 17A of the Exchange Act and
  • has a public float of less than $75 million as of the last business day of its most recently completed semiannual period.

Offering Statement

Electronic Filing

Regulation A+ offering statements must be filed with the SEC electronically on the EDGAR system, with the Form 1-A consisting of three parts:

  • an XML-based fillable form, similar to Form D;
  • a text file attachment containing the body of the disclosure document and financial statements, formatted in HTML or ASCII; and
  • text file attachments, containing the exhibits index and the exhibits to the offering statement, formatted in HTML or ASCII.

Additionally, all other documents required to be submitted or filed with the SEC in conjunction with a Regulation A offering, such as ongoing reports, must be submitted or filed electronically on EDGAR.

Delivery Requirements

The SEC adopted the proposed “access equals delivery” model for Regulation A final offering circulars. Upon qualification of an offering statement, where sales of Regulation A securities occur on the basis of offers made using a preliminary offering circular, issuers and intermediaries may presume that investors have access to the Internet and are permitted to satisfy their delivery requirements for the final offering circular if it is filed and available on EDGAR. (The “qualification” process under Regulation A is similar to the process of a registration statement being declared effective under the Securities Act.) Issuers are also required to include a notice in all preliminary offering circulars that informs potential investors that the issuer may satisfy its delivery obligations for the final offering circular electronically. As with registered offerings, dealers shall, during the aftermarket delivery period, be deemed to satisfy their final offering circular delivery requirements if the final offering circular is filed and available on EDGAR.

Consistent with prior SEC releases regarding the use of electronic media for delivery purposes, “electronic-only” offerings of Regulation A securities will be permitted. An issuer and its participating intermediaries, however, must obtain the consent of investors for electronic delivery.

Withdrawal

Under the new rules, an issuer may withdraw an offering statement, with the SEC’s consent, if no securities have been sold and the offering statement is not the subject of an SEC order. The SEC may declare an offering statement abandoned if it has been on file for nine months without amendment and has not become qualified. These withdrawal and abandonment procedures are similar to those that apply to current SEC reporting companies.

Non-Public Submission of Draft Offering Statements

The final rules allow the non-public submission of draft Regulation A offering statements by issuers. The SEC noted, however, that these submissions will not be subject to the statutorily-mandated confidentiality of draft IPO registration statements submitted by “emerging growth companies” under the JOBS Act.

Non-public submissions are permitted for issuers whose securities have not been previously sold pursuant to Regulation A or an effective registration statement under the Securities Act. As with the confidential submission of draft registration statements, all non-public submissions of draft offering statements will be submitted via EDGAR. The initial non-public submission, all non-public amendments to it and correspondence with SEC staff regarding those submissions are required to be publicly filed as exhibits to the offering statement not less than 21 calendar days before qualification of the offering statement.

Although non-publicly submitted offering statements must be submitted electronically on EDGAR, the SEC will not make those offering statements publicly available on EDGAR as a matter of course. Because there is no statutory basis for withholding non-public submissions from production (absent a FOIA exemption), issuers should note that the SEC may be compelled to provide those materials to a requesting party (or to otherwise make them publicly available) before the date on which an issuer would otherwise have been required to publicly file on EDGAR.

Unlike emerging growth companies, which must publicly file any confidential submissions not later than 21 calendar days before a road show, the timing requirements for filing by issuers seeking qualification under Regulation A does not depend on whether or not the issuer conducts a road show.

Form and Content

The SEC has elected to maintain Form 1-A’s existing three-part structure, while revising and updating the Form. Although a discussion of all the changes to Form 1-A is outside the scope of this Client Alert, we note the following sections to which the SEC has adopted substantive changes:

  • Part I:
    • Item 1 – Issuer Information;
    • Item 2 – Issuer Eligibility;
    • Item 3 – Application of Rule 262 – “bad actor” disqualification and disclosure;
    • Item 4 – Summary Information Regarding the Offering and other Current or Proposed Offerings; and
    • Item 6 – Unregistered Securities Issued or Sold Within One Year.
  • Part II:
    • elimination of Model A (a “fill in the blanks” form) as a disclosure option, and
    • updating Model B as a disclosure option and renaming it “Offering Circular.”

Continuous or Delayed Offerings and Offering Circular Supplements

Before the amendments, Regulation A required every revised or updated offering circular in a continuous offering to be filed as an amendment to the offering statement and to be requalified in a process similar to the SEC staff review, comment and qualification process for initial offering statements. This process is different from a continuous offering under Rule 415, in which the SEC does not necessarily require every change in the information in a continuous offering to be reflected in a post-effective amendment. This requalification process can be costly and time consuming.  To address these concerns, the SEC clarified the scope of permissible continuous or delayed offerings and the related concept of offering circular supplements.

Under the new rules, certain traditional shelf offerings will be permitted by Regulation A. The ability to sell securities in a continuous or delayed offering, however, will be conditioned upon the issuer being current with ongoing reporting requirements at the time of sale. This rule provides for continuous or delayed offerings for the following:

  • securities offered or sold by or on behalf of a person other than the issuer or its subsidiary;
  • securities offered and sold pursuant to a dividend or interest reinvestment plan or an employee benefit plan of the issuer;
  • securities issued upon the exercise of outstanding options, warrants or rights;
  • securities issued upon conversion of other outstanding securities;
  • securities pledged as collateral; or
  • securities the offering of which commences within two calendar days after the qualification date, will be made on a continuous basis, may continue for a period in excess of 30 days from the date of initial qualification, and will be offered in an amount that, at the time the offering statement is qualified, is reasonably expected to be offered and sold within two years from the initial qualification date.

The SEC has declined to permit the following types of continuous or delayed offerings under Regulation A, among others:

  • transactions typically done on Form S-4, such as acquisition shelf business combination transactions; and
  • “at the market” offerings under Regulation A.

Under the new rules, changes in the information contained in the offering statement will not necessarily trigger an obligation to amend. Offering circulars for continuous Regulation A offerings will continue to be required to be updated, and the offering statements to which they relate 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.” In addition to post-qualification amendments to the offering statement that must be qualified, however, the SEC will also allow issuers to use offering circular supplements in certain situations, and to permit issuers in continuous offerings to qualify additional securities in reliance on Regulation A by a post-qualification amendment. In proposing the above, the SEC stated it was creating a regime similar to that permitted for registered offerings by Rule 424, Item 512 of Regulation S-K, and Rule 430A to do so.

Qualification

In the final rules, the SEC altered the qualification process so that an offering statement may be qualified by “notice of qualification” issued by the Division of Corporation Finance. A notice of qualification is analogous to a notice of effectiveness in registered offerings.

Solicitation of Interest, i.e., “Testing the Waters”

Regulation A permits the distribution of solicitation materials before a prospective offering to “test the waters” for investor interest before incurring the expenses related to an offering. Before this amendment, testing the waters could occur only before the offering materials were filed with the SEC for review, limiting its practical value.

Under Regulation A+, issuers may use testing the waters solicitation materials both before and after filing an offering statement with the SEC. Issuers will be required to comply with certain filing and disclaimer requirements, and testing the waters solicitation materials distributed after the offering statement has been filed with the SEC must be accompanied by the current preliminary offering circular or a notice informing potential investors where and how it may be obtained.

Additionally, issuers will be required to file offering statements publicly not later than 21 days before qualification. Once filed, an issuer and its intermediaries are required to update and redistribute solicitation materials that become materially inaccurate or inadequate. Whether or not an issuer and its intermediaries test the waters, they remain obligated in the pre-qualification period to deliver the preliminary offering circular to prospective purchasers at least 48 hours in advance of sale under Rule 251(d)(2)(i).

The adopted rules revise the filing requirements for solicitation materials for Regulation A offerings and no longer require submission of those materials at or before first use. Pursuant to amended Rule 254, issuers are now permitted to file solicitation materials as an exhibit to the offering statement when submitted for non-public review or when filed.

Before the adoption of the amendments, Rule 254(b)(2) required all soliciting materials to bear a legend or disclaimer that notes, among other things, “that no sales will be made or commitments to purchase accepted until a complete offering circular is delivered.” The SEC amended this language to make sales contingent on the qualification of the offering statement rather than the delivery of a final offering circular.

Ongoing Reporting

Continuing Disclosure Obligations

The final rules eliminate Form 2-A, which provides sales information and is required to be filed every six months after offering qualification and 30 days after the offering termination. Noting the loss of valuable data because issuers seldom adhered to these filing requirements, the SEC will now require that substantially the same information be disclosed on Form 1-Z for Tier 1 issuers and, depending on when the issuer’s offering is completed, on Form 1-K or Form 1-Z for Tier 2 issuers.

Tier 2 filers will now be subject to ongoing reporting annually on Form 1-K and semi-annually on new Form 1-SA and to current event reporting on new Form 1-U. Issuers are also required to provide notice to the SEC of the suspension of their ongoing reporting obligations on Part II of proposed new Form 1-Z. All reports will be filed electronically on EDGAR.

Annual Reports on Form 1-K

The SEC adopted the new Form 1-K as proposed.  Tier 2 issuers will file Form 1-K, consisting of two parts, Part I (Notification) and Part II (Information to be included in the report), annually.

Part I is an electronic form that prepopulates certain basic information based on previously filed information. Once an offering is terminated, notification of that termination and updated summary information about the offering and the issuer may be filed under Part I. Alternatively, an issuer could satisfy its obligation to file the summary offering information by filing a Form 1-Z including that information.

Part II will also be filed electronically as a text file attachment containing the body of the disclosure document and financial statements. Required disclosures include:

  • business operations for the prior three fiscal years or since inception, whichever is shorter;
  • transactions with related persons, promoters and certain control persons;
  • beneficial ownership of voting securities by executive officers, directors and 10% owners;
  • identification of directors, executive officers and significant employees;
  • compensation information for the three highest paid officers or directors; and
  • two years of audited financial statements and a section containing management’s discussion and analysis of the issuer’s liquidity, capital resources and results of operations for the two most recently completed fiscal years.

Form 1-K must be filed within 120 calendar days of an issuer’s fiscal year end.

Semi-annual Reports on Form 1-SA

Semi-annual reporting by Tier 2 issuers includes unaudited financial information and, like Form 10-Q, consists primarily of financial statements and an MD&A section. Form 1-SA also requires updates not otherwise disclosable on Form 1-U (the form for current reports). Form 1-SA must be filed within 90 calendar days after the end of the issuer’s second fiscal quarter.

Current Reports on Form 1-U

Issuers are required to report certain fundamental changes that have occurred or that the issuer reasonably expects will occur, within four business days on Form 1-U. Events triggering a Form 1-U filing requirement include:

  • fundamental changes in the nature of business;
  • bankruptcy or receivership;
  • material modification of the rights of security holders;
  • change in the issuer’s certifying accountant;
  • non-reliance on previous financial statements;
  • changes in control of the issuer;
  • departure of the principal executive, principal financial or principal accounting officers; and
  • unregistered sales of 5% or more of outstanding equity securities.

Form 1-U is similar in certain respects to Form 8-K filing requirements but changes the reporting threshold from materiality to a fundamental change standard.

Special Financial Reports on Form 1-K and Form 1-SA

The new rules add a requirement to file certain available financial information of an issuer after an offering qualification to close “lengthy gaps” in financial reporting between the Form 1-A financial statements and the first periodic report due after qualification of an offering statement. The special financial reports are analogous to those required under Exchange Act Rule 15d-2.

A Form 1-K, including audited financial statements, must be filed within 120 calendar days after qualification. Unaudited semiannual financial statements must be filed within 90 calendar days after qualification if the offering statement did not include those financial statements and the offering statement was qualified in the second half of the issuer’s current fiscal year.

Reporting by Successor Issuers

Successor issuers will continue to file reports for Tier 2 issuers on the same basis as would have been required of the original issuer. The successor issuer will also have the same suspension or termination rights for reporting obligations as the original issuer, pursuant to Rule 257(d).

Termination of Reporting Obligation

Tier 2 issuers are now permitted to terminate reporting obligations in a manner similar to that currently permitted under Sections 13 and 15 of the Exchange Act. A Tier 2 issuer may suspend ongoing reporting obligations immediately in any fiscal year after the year in which the offering was made if (a) all ongoing reports required by Regulation A have been filed for the shorter of (1) the period since the issuer became subject to the reporting obligation or (2) the most recent three fiscal years and the portion of the current year preceding the date of filing Form 1-Z, and (b) the securities of each class to which the offering statement relates are held by fewer than 1,200 persons and offers or sales of those securities under Regulation A are not ongoing.

A Tier 2 issuer’s reporting obligation will be automatically suspended upon registration of a class of securities under Section 12 of the Exchange Act or registration of an offering of securities by the issuer under the Securities Act. Under these circumstances, the issuer would not be required to file a Form 1-Z notification.

Exchange Act Rule 15c2-11 and Other Implications of Ongoing Reporting under Regulation A

Exchange Act Rule 15c2-11 permits broker-dealers to publish quotations for securities other than on a national securities exchange, provided it reviews and retains certain information about the issuer. The final rules amended Rule 15c2-11 to permit broker-dealers to rely on the ongoing disclosures provided by Tier 2 issuers to satisfy the requirements of the rule.

The proposal requested comment as to whether similar relief should be provided as it relates to Rule 144(c) and Rule 144A(d)(4), such that Tier 2 issuer ongoing disclosures would meet their “adequate current public information” and information requirements standards, respectively. The SEC declined to adopt provisions in the final rules so that Tier 2 ongoing reports will satisfy the current information requirements of Rule 144 and Rule 144A for the entirety of an issuer’s fiscal year, noting that the frequency of the required Tier 2 ongoing reporting does not merit a broad determination that such reports will constitute “adequate public information” or “reasonably current information” on a year-round basis. 

On the other hand, the SEC noted that issuers may voluntarily submit on Form 1-U quarterly financial statements or other information necessary to satisfy the respective rule requirements.  In such instances, and provided that the financial statements otherwise meet the financial statement requirements of Form 1-SA, such voluntarily provided quarterly information could satisfy the “reasonably current information” and “adequate current public information” requirements of Rule 144 and Rule 144A.  An issuer that is therefore current in its semiannual reporting required under the rules and voluntarily provides quarterly financial statements on Form 1-U will have provided reasonably current and adequate current public information for the entirety of such year under Rule 144 and Rule 144A.

Exchange Act Registration of Regulation A Securities

The SEC has simplified Exchange Act registration in connection with Regulation A offerings so that Tier 2 issuers that follow Part I of Form S-1 or the Form S-11 disclosure model in the offering circular may register a class of securities by filing a Form 8-A in conjunction with the qualification of Form 1-A.

Bad Actor Disqualification

Section 3(b)(2) of the Securities Act permits the SEC to adopt rules disqualifying felons and other bad actors from using the new Regulation A exemption. The SEC proposed to amend Rule 262 to conform to the rules adopted under Rule 506(d), but without the categories of covered persons specific to fund issuers, which would not be eligible to use Regulation A under the current proposal.

In brief, “covered persons” include:

  • the issuer, its predecessors and affiliated issuers;
  • the issuer’s directors, officers, general partner or managing member, and 20% or more beneficial owners;
  • promoters, compensated solicitors and underwriters of the offering; and
  • directors, officers, general partners or managing members of compensated solicitors and underwriters of the offering.

“Disqualifying events” include certain securities-related:

  • criminal convictions within the past five years for the issuer, its predecessors and affiliated issuers, and within the past 10 years for all other covered persons;
  • court injunctions and restraining orders;
  • final orders issued by state securities, banking, credit union and insurance regulators, or federal banking regulators, the U.S. CFTC, or the National Credit Union Administration barring a covered person from association with a regulated entity or involving fraud;
  • SEC disciplinary orders, cease and desist orders;
  • suspension or expulsion from membership in an SRO; and
  • stop orders suspending a previous Regulation A exemption.

The principal differences effected by the adoption of the amendments to Rule 262 include making the bar applicable at the time of filing the offering statement versus the time of first sale under Rule 506, because Regulation D does not have a filing requirement before the time of first sale. Consistent with Rule 506, Rule 262 now includes a reasonable care exception that permits an issuer to use the Regulation A exemption if it could show that it did not know, and in the exercise of reasonable care could not have known, of the existence of a disqualification.

Further Expansion of the Exemption

As part of its release, the SEC requested comment on whether one or more additional, intermediate tiers would be appropriate under Regulation A, and whether the $50 million upper limit for offerings should be raised. Many commenters recommended making changes to Tier 1 to make it a more viable option for small business capital formation. The SEC noted that it took these comments into consideration in structuring the final rules to make Tier 1 more useful for small business capital formation; however, it declined to adopt a third or intermediate tier.