On March 25, 2015, the SEC has adopted amendments to Regulation A and other rules and forms expanding them pursuant to the mandate of Section 401(a) of the JOBS Act.
Under the former Regulation A, offerings by an issuer could not exceed $5 million in any 12-month period. Moreover, unlike securities issued in offerings exempt under Rule 506 of Regulation D, securities issued in offerings under former Regulation A were not "covered securities" under the National Securities Markets Improvement Act. Therefore, the issuer typically had to comply with the registration and qualification requirements of the blue sky laws of all relevant states.
The amended Regulation A or “Regulation A+”, as it is informally known, is an expanded and modernized version of the former Regulation A, as described below. Some important provisions (such as offering size, investor limitations, audited financial statement requirements, and blue sky preemption) differ between Tier 1 and Tier 2 offerings under Regulation A+. The final rule amendments, which are complex and lengthy, will be effective 60 days after publication in the Federal Register.
Here is a brief overview of the new rules. This is a summary only: consult one of the Quarles & Brady attorneys listed below about the specific terms and limitations that may be applicable to you.
Regulation A+ is available only to issuers organized in and having their principal place of business in the United States or Canada. In addition, it is not available to:
- Companies already subject to ongoing reporting requirements under the Exchange Act;
- Business development companies and companies registered or required to be registered under the Investment Company Act;
- Development stage companies that have no specific business plan or purpose or whose business plan is to engage in a merger or acquisition with an unidentified company or companies (so called, “blank check” companies);
- Issuers of fractional undivided interests in oil, gas or other mineral rights;
- Issuers disqualified under the “bad actor” provisions of Rule 262.
- Issuers that are required to file, but have not filed, the ongoing reports required by Regulation A during the two years immediately preceding the filing of a new offering statement;
- Issuers that are or have been subject to an SEC order denying, suspending or revoking the registration of a class of securities under the Exchange Act within five years before the filing of the offering statement.
Only the last two of these eligibility requirements are new.
The final rules limit the types of securities eligible for sale under Regulation A to the specifically enumerated list in Section 3(b)(3) of the Securities Act, which includes warrants and convertible equity securities among other equity and debt securities.
Offering Limitations and Secondary Sales
In contrast to Rule 506 of Regulation D, Regulation A+ issuers may sell securities to an unlimited number of non-accredited investors provided they abide by the following offering limitations.
Under the final rules, the Tier 1 offering limitation is $20 million in a 12-month period (up from $5 million prior to the new rules). The Tier 2 offering limitation is $50 million in a 12-month period.
There are several kinds of limitations on secondary sales. For a Tier 1 offering, secondary sales are limited to $6 million in a 12-month period (up from $1.5 million prior to the new rules). For Tier 2 offerings, secondary sales are limited to $15 million in a 12-month period.
In addition, (1) secondary sales at the time of an issuer's first Regulation A offering and within 12 months thereafter cannot exceed 30 percent of the aggregate offering price of that particular offering and (2) for affiliates only, the $6 million and $15 million annual limitations on secondary sales continue indefinitely.
The securities sold in a Regulation A offering are not “restricted securities” under Rule 144 of the Securities Act. Therefore, resales of the securities by persons who are not affiliates of the issuer are not subject to transfer restrictions under Rule 144. However, resales by affiliates (other than registered resales or secondary sales under regulation A) will continue to be subject to the limitations of Rule 144, other than the holding period requirement.
Investment Limitations (Tier 2 Offerings Only)
Except as provided in the following sentence, the amount of securities that an investor can purchase in a Tier 2 offering is limited to no more than 10 percent of the investor's annual income or net worth (for other than natural persons the limit is 10 percent of revenue or net assets as of the most recent fiscal year end). These limitations do not apply, however, to purchasers who qualify as accredited investors under Regulation D or to securities that will be listed on a national securities exchange upon qualification.
Integration Safe Harbor
Under the new rule 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 with respect to indications of interest Rule 255(c);
- made pursuant to an exempt offering pursuant to a compensatory benefit plan or contract under Rule 701 of the Securities Act;
- made pursuant to an employee benefit plan;
- made outside the United States 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.
Conditional Exemption from Exchange Act Registration (Tier 2 Offerings)
Securities issued in a Tier 2 offering are exempt from the Exchange Act registration requirements of Section 12(g) if and for so long as the issuer remains subject to, and is current in (as of its fiscal year end) its Regulation A periodic reporting obligations, provided the following additional conditions are also met:
- the issuer has engaged a transfer agent that is appropriately registered with the SEC; and
- the issuer has a public float of less than $75 million (or, in the absence of a public float, annual revenues of less than $50 million) (similar to the "smaller reporting company" qualifications).
If an issuer ceases to meet the last test, Exchange Act registration is required at the end of a two year transition period.
Offering Statement Requirements
All offerings under Regulation A+ will continue to require an extensive offering statement on Form 1-A which is subject to SEC staff review and comment. The new rules require expanded disclosures using an offering circular disclosure format (the optional question and answer format has been eliminated) on EDGAR and include requirements (similar for registered offerings) for use of eXtensible Markup Language (XML), HyperText Markup Language (HTML) or American Standard Code for Information Interchange (ASCII) for selected portions, but also permit confidential filings as discussed below. The final rules require an explicit notice of qualification by the SEC’s Division of Corporation Finance which has an effect similar to a declaration that a registration statement is effective.
An issuer that has not previously filed a qualified offering statement under Regulation A or a registration statement under the Securities Act can submit draft offering statements for nonpublic review by the SEC staff, provided a public filing is made at least 21 days before qualification.
Two years of financial statements are required. For Tier 2 offerings, the financial statements are required to be audited in compliance with Regulation S-X. In some circumstances, interim financial statements are also required.
Tier 1 issuers will provide information about sales and to update certain issuer information by filing a Form 1-Z exit report with the SEC not later than 30 calendar days after termination or completion of an offering.
Tier 2 issuers will file annual reports on Form 1-K and semiannual and current event reports. However, a Tier 2 issuer that elects to terminate its ongoing reporting requirement before it has disclosed this information in a Form 1-K may satisfy this requirement by instead including this information in its exit report on Form 1-Z.
Preemption of Blue Sky Laws (Tier 2 Offerings Only)
The final rules preempt state registration and qualification requirements offerings to “qualified purchasers,” which is limited to mean any person to whom securities are offered or sold in a Tier 2 offering but does not include offerees in Tier 1 offerings. Therefore, Tier 1 offerings will be subject to both Regulation A and state registration and qualification requirements. The coordinated review program developed by the North American Securities Administrators Association will apply only to tier 1 offerings but it remains to be seen whether state filings will proceed more smoothly. Regulation A+ issuers may test the waters and make offers in the pre-qualification period at the federal level, but the states retain oversight over how these offerings are conducted at the state level. Further, despite any preemption, states retain authority to:
- require the filing of any documents filed with the SEC “solely for notice purposes and the assessment of any fee”;
- enforce filing and fee requirements by suspending offerings within a given state; and
- investigate and bring enforcement actions with respect to fraudulent transactions.