As part of its mandate under the JOBS Act to facilitate capital raises by smaller companies and emerging businesses and its continuing effort to broaden the number of investment options for investors, the Securities and Exchange Commission (“SEC”), on March 25, 2015, adopted final rules to amend Regulation A under the Securities Act of 1933 (the “Act”), which have become commonly known as “Regulation A+.” These new rules become effective June 19, 2015, 60 days after their publication in the Federal Register.
The SEC adopted the new rules to expand the existing exemption from the registration requirements of the Act under Regulation A, the so-called small offering exemption, which had limited appeal and use, in large part due to its maximum offering amount of only up to $5 million in any 12-month period. Among other changes, the new rules amend Regulation A to increase the maximum offering amount to $50 million in any 12-month period and preempt the application of state securities laws when conducting offerings greater than $5 million.
The revised Regulation A rules establish two tiers of offerings, Tier 1 and Tier 2, which are bifurcated in accordance with the aggregate offering amount. Tier 1 offerings have an annual offering limit of $20 million, including no more than $6 million in offers by selling securityholders that are affiliates of the issuer. Tier 2 offerings have an annual limit of $50 million, including no more than $15 million in offers made by selling securityholders that are affiliates of the issuer. For both tiers, there is a limit on selling securityholders, including non-affiliates, in an issuer’s initial offering, and any subsequently qualified Regulation A offering within the first 12 months following the date of qualification of the initial Regulation A offering, to no more than 30 percent of the aggregate offering price.
Under the new rules, Regulation A offerings are limited to issuers organized under the laws of the United States or Canada. Further, the exemption is not available to any issuer that is
- subject to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”);
- a development stage company that either has no specific business plan or purpose, or has indicated that it plans to merge with or acquire an unidentified company;
- a registered investment company or business development company;
- seeking to issue fractional undivided interests in oil or gas rights or similar interests in mineral rights; or
- disqualified by “bad actor” rules that are substantially similar to the “bad actor” rules for private placements that are set forth in Rule 506(d).
Issuers relying on Regulation A still must comply with specific guidelines in conducting their offerings in order to preserve the exempt nature of the offering. Under the rules, issuers conducting Tier 1 and Tier 2 offerings must submit and file offering statements with the SEC. Although such offering statements are less extensive than registration statements filed with the SEC in connection with an IPO, Regulation A offering statements will still be subject to SEC scrutiny and must be qualified by the SEC. Along with its offering documentation, an issuer must also file financial statements for the two most-recently completed fiscal years. For Tier 2 offerings, the financial statements included with the filings must be audited.
Other important attributes of Regulation A applicable to Tier 1 and Tier 2 offerings include the following:
- Issuers are permitted to “test the waters” by distributing limited solicitation materials both before and after filing of the offering statements, so long as any solicitation materials used after publicly filing an offering statement are preceded or accompanied by a preliminary offering circular or a notice advising potential investors where they may obtain a preliminary offering circular.
- Issuers may submit confidential non-public offering statements for review by the SEC prior to filing, and the SEC will offer a pre-filing determination of exemption.
- Issuers may offer and sell securities to both accredited and non-accredited investors, although for Tier 2 offerings that are not listed on a national securities exchange, the aggregate purchase price to be paid by a non-accredited investor may not exceed 10 percent of the greater of such investor’s annual income or net worth, if a natural person, or revenue or net assets, if an entity.1
- Issuers may not sell asset-backed securities under Regulation A.
- Securities sold under Regulation A are not “restricted securities” and thus are not subject to the transfer restrictions of Rule 144, an important distinction from offerings made under Rule 506.
- Securities sold under Regulation A are not deemed integrated with prior offers or sales of securities or with certain subsequent offers or sales.
While Tier 1 and Tier 2 offerings share many of the same key attributes, there are also important differences other than the permitted maximum offering amounts, including the following:
- State “blue sky” securities laws are preempted for Tier 2 offerings. In contrast, Tier 1 offerings are subject to state qualification and registration requirements, in addition to SEC qualification.
- Issuers selling securities through a Tier 2 offering are subject to ongoing reporting requirements, including annual reports on Form 1-K (with audited financial statements), semi-annual reports on Form 1-SA, and current reports on Form 1-U. The reporting obligations of Tier 2 issuers, however, will be suspended (i) if the issuer becomes subject to the reporting obligations under Section 13 or 15(d) of the Exchange Act or (ii) after completing its reporting obligations for the fiscal year in which the SEC qualified the offering statement, (A) the class of securities of the issuer to which the offering related is held by fewer than 300 persons (or 1,200 for banks or bank holding companies) and (B) the issuer has filed all required reports for the shorter of (1) the period since the issuer become subject to such reporting obligations or (2) the issuer’s most recent three fiscal years and the portion of the year before filing an exit report.
- Tier 2 issuers are exempt from the registration requirements of Section 12(g) of the Exchange Act (i.e., those applicable to issuers with at least $10 million in assets and a class of equity securities held by at least 2,000 persons, or 500 non-accredited investors), provided that the issuer remains current in its reporting obligations under Regulation A, has engaged the services of a registered transfer agent, and has a public float of less than $75 million or, in the absence of public float, had annual revenues of less than $50 million as of its most recently completed fiscal year.
Despite these adjustments creating greater flexibility, it is too soon to tell whether a significant number of issuers will take advantage of these new rules, particularly since private offerings under Rule 506 now allow for general solicitation and advertising and have no maximum offering amount. As revised, Regulation A does not remove all of the barriers to raising capital that hindered the acceptance of Regulation A as the exemption of choice by small issuers. While the final rules significantly raise the maximum offering amount under Regulation A from $5 million to $50 million and add flexibility for issuers seeking to raise capital without registration, they do not seem to position Regulation A as the preferred means to do so. Ultimately, issuers relying on Regulation A are still limited in whom they may solicit, the amount that can be raised from those solicited, and the manner in which they may solicit potential investors. Additionally, issuers under Regulation A are subject to content and filing requirements for offering statements, as well as ongoing reporting requirements following the offerings.