The Securities and Exchange Commission voted on December 18, 2013 to propose rules designed to build upon current Regulation A, the exemption from registration for small offerings of up to $5 million in securities within a 12-month period.  The proposed exemption, mandated by Title IV of the Jumpstart Our Business Startup (JOBS) Act and commonly referred to as “Regulation A+,” would expand the current Regulation A to enable companies to offer and sell up to $50 million of securities within a 12-month period.


Regulation A+ is a proposed rule that would, if adopted, amend Regulation A to implement Section 401 of the JOBS Act.  Section 401 of the JOBS Act added Section 3(b)(2) to the Securities Act of 1933, which directs the SEC to adopt rules exempting offerings of up to $50 million of securities annually from the registration requirements of the Securities Act.  In its proposed rule, the SEC noted that “Congress enacted Section 3(b)(2) against a background of public commentary suggesting that Regulation A, an exemption for small issues . . . , should be expanded and updated to make it more useful to small companies.”

The SEC has proposed to expand and revise Regulation A to permit two tiers of offerings:

  • Tier 1, for offerings of up to $5 million in a 12-month period, and
  • Tier 2, for offerings of up to $50 million in a 12-month period.

Both Tiers would be 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.  In addition to these basic requirements, Tier 2 offerings would 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.


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

  • Maximum Offering Amount Increased to $50 Million.  The maximum offering amount would be increased from $5 million, the current Regulation A limit, to $50 million in a 12-month period for a “Tier 2 offering.”
  • Limitation on Amount that Any Investor Can Invest.  An investor would be able to 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, with annual income and net worth being calculated for individual purchasers as provided in the definition of “accredited investor” under Rule 501 of Regulation D.
  • Audited Financial Statements.  Issuers in Tier 2 offerings would be required to include audited financial statements in their offering documents and to file annual reports that would include audited financial statements.
  • State Securities Law Preemption.  State securities law registration and qualification requirements for securities offered or sold to “qualified purchasers” – which is defined to be all offerees of securities in a Regulation A offering and all purchasers in a Tier 2 offering – would be preempted “[i]n light of the total package of investor protections proposed to be included in the implementing rules for Regulation A.”

Offering Limitations and Secondary Sales

As noted above, the SEC proposed to amend Regulation A to create two tiers of offerings: Tier 1, for offerings of up to $5 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 issuer sales, the proposed rules would permit sales by selling shareholders of up to 30% of the maximum amount permitted under the applicable offering limitation.  For example, selling shareholders in a Tier 1 offering could sell no more than $1.5 million of securities, and selling shareholders in a Tier 2 offering could sell up to $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.

The SEC also proposed to eliminate the current Regulation A restriction that prohibits affiliate resales unless the issuer has had net income from continuing operations in at least one of its last two fiscal years.

Investment Limitation

Regulation A does not currently limit the amount of securities an investor can purchase in a qualified Regulation A offering, but the rule proposed by the SEC seeks to limit the amount of securities that investors can purchase in a Tier 2 offering to no more than 10% of the greater of their annual income and their net worth, with annual income and net worth being calculated for individual purchasers as provided in the accredited investor definition under Rule 501 of Regulation D.  This limitation is a key part of the total package of investor protections that the SEC believes will justify Blue Sky law preemption.

Under the proposal, issuers would be required to make investors aware of the investment limitations but would otherwise be able to rely on an investor’s representation of compliance with the proposed investment limitation unless the issuer knew, at the time of sale, that any such representation was untrue.  That said, the SEC is seeking comment on whether issuers should be required to verify the income and net worth limit.

Relationship with State Securities Law

Currently, issuers conducting Regulation A offerings must comply with state securities laws in each state in which the offering is 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 newly proposed Regulation A exemptions.

The advocate for state securities regulators, the North American Securities Administrators Association (NASAA), recently proposed a coordinated review process for Regulation A filings that would alleviate this compliance burden somewhat.  NASAA would establish a central electronic filing depository for issuers, and a program administrator would appoint lead disclosure and merit examiners to coordinate the review process among participating jurisdictions.

The SEC observed, however, that NASAA’s proposal was in its early stages and that it was unclear how many states would elect to participate and even whether such a program would be adopted at all.  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,” as the SEC would define that term, in the category of covered securities that are exempt from state regulation.

The SEC expects that many Regulation A issuers would not meet the standards for listing on a national securities exchange, leaving this prong of the exemption with limited impact.  To facilitate state law preemption and encourage the use of Regulation A as a tool for capital formation, the SEC included a broad definition of “qualified purchaser” in the proposed rulemaking, as follows:

  • all offerees; and
  • all purchasers in a Tier 2 offering.

State law preemption is appropriate and would facilitate the use of Regulation A as a “workable approach to capital raising,” said the SEC, based on significant investor protections that include substantive and ongoing issuer disclosure requirements for Tier 2 offerings, limitations on the amount than an investor can invest in Tier 2 offerings, SEC staff review of offering statements, “bad actor” disqualification provisions and limitations on eligible issuers, among other things.

Predictably, NASAA is opposing state law preemption, stating in a December 18, 2013 press release:

“The Commission’s proposed rule ignores Congress’ recent judgment and defies Congress’ clear intent.  As a policy matter, it is not clear why the Commission would remove state oversight in a high-risk area where both federal and state resources should be fully leveraged to provide sufficient, regular review.”

We expect that investor protection advocates such as the Consumer Federation of America will take a similar position.  We think the SEC struck the right balance here and that state law preemption will be included in the final rules, although the “total package of investor protections” may be enhanced in light of comments the SEC receives.

Eligible Issuers

Regulation A is presently limited to companies organized in and with their principal place of business inside the United States or Canada.  It is currently unavailable to:

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

The proposed rule adds additional categories of ineligible issuers, but otherwise keeps the present rule intact.  Those proposed 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 proposed 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 SEC proposed to limit the types of securities for sale under Regulation A to equity securities, debt securities, and debt securities convertible or exchangeable into equity interests, including any guarantees of those securities.  The SEC specifically excluded asset-backed securities.


Regulation A currently provides that any offer or sale made in reliance on Regulation A will not be subject to integration with any other offer or sale made either before the commencement of, or more than six months after the completion of, the Regulation A offering.  In proposing Regulation A+, the SEC noted that it believes that an offering made in reliance on Regulation A should not be integrated with another exempt offering by the issuer if each offering complies with the requirements of the exemption being relied upon for the particular offering.  In addition, the SEC also proposed to add to the safe harbor offers and sales of crowdfunding securities that occur after the commencement of any offers or sales of securities made in reliance on Regulation A.

The SEC also proposed to amend Regulation A to provide that if an issuer decides to register an offering after soliciting interest in a contemplated, but later abandoned, Regulation A offering, any offers made pursuant to Regulation A would not be subject to integration with the registered offering unless the issuer engaged in solicitations of interest in reliance on Regulation A to persons other than QIBs and institutional accredited investors permitted by Section 5(d) of the Securities Act.  An issuer (and any underwriter, broker, dealer, or agent participating in the proposed offering) that solicits interest in a Regulation A offering to persons other than QIBs and institutional accredited investors must wait at least 30 calendar days between the last such solicitation of interest in the Regulation A offering and the filing of the registration statement with the SEC.

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 a company that meets the following tests to register as a reporting company under the Exchange Act:  total assets exceeding $10,000,000 and a class of equity security (other than an exempted security) held of record by either: (a) 2,000 persons, or (b) 500 persons who are not accredited investors.

In the proposing release, the SEC expressed concern that if securities issued under Regulation A were excluded from Section 12(g), a company may never become subject to mandatory Exchange Act reporting, regardless of how many shareholders it has or whether those shareholders were accredited investors.  Accordingly, the SEC has not proposed to exempt Regulation A securities from the requirements of Section 12(g).  The SEC requested comment as to whether Regulation A should include a Section 12(g) exemption or suspension.

Liability under Section 12(a)(2) of the Securities Act

As with current Regulation A, sellers of Regulation A securities would be liable under Section 12(a)(2) to investors for any offer or sale that includes a material misleading statement or material misstatement of fact.

Offering Statement

Electronic Filing

Currently, Regulation A offering statements are filed with the SEC in paper form.  Section 3(b)(2)(G)(i) of the JOBS Act gives the SEC discretion to require an offering statement in such form and with such content as it determines necessary in the public interest and for the protection of investors, and permits electronic filing of those statements.

The SEC’s proposed rule calls for Regulation A offering statements to 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.

In addition to the above, the SEC further proposed to require all other documents required to be submitted or filed with the SEC in conjunction with a Regulation A offering, such as ongoing reports, to be submitted or filed electronically on EDGAR.

Delivery Requirements

In its release, the SEC proposed an “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 could presume that investors have access to the Internet and would be 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.)  The SEC also proposed to require issuers to include a notice in any preliminary offering circular they use that would inform potential investors that the issuer may satisfy its delivery obligations for the final offering circular electronically.  As with registered offerings, the SEC proposed to permit dealers, during the aftermarket delivery period, to 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 on the use of electronic media for delivery purposes, “electronic-only” offerings of Regulation A securities would be permitted.  An issuer and its participating intermediaries, however, would have to obtain the consent of investors to electronic delivery.  The SEC also proposed to revise a number of the other delivery requirements of Regulation A.


The SEC proposed to allow an issuer to 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.  Under the proposed rules, the SEC also would be able to 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 proposed rules allow the non-public submission of draft Regulation A offering statements by issuers.  The SEC noted, however, that those submissions would not be subject to the statutorily-mandated confidentiality of draft IPO registration statements submitted by “emerging growth companies” under the JOBS Act.

Under the proposal, non-public submissions would be 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 would be submitted via EDGAR.  The initial non-public submission, all non-public amendments to it, and correspondence with SEC staff regarding those submissions would be required to be publicly filed as exhibits to the offering statement not less than 21 calendar days before qualification of the offering statement.

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 would not depend on whether or not the issuer conducts a road show.

Form and Content

Currently, Form 1-A consists of three parts: Part I (Notification), Part II (Offering Circular), and Part III (Exhibits).  In its proposal, the SEC 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 proposed 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; and
  • Part II:
    • elimination of Model A (a “fill in the blanks” form) as a disclosure option, andupdating Model B as a disclosure option and renaming it “Offering Circular.”

Continuous or Delayed Offerings and Offering Circular Supplements

Regulation A presently requires 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, which the SEC notes does not necessarily require every change in the information in a continuous offering to be reflected in a post-effective amendment.  The current Regulation A requalification process can be costly and time consuming, and to address these concerns the SEC clarified the scope of permissible continuous or delayed offerings and the related concept of offering circular supplements.

As proposed, Regulation A would continue to allow certain traditional shelf offerings.  The ability to sell securities in a continuous or delayed offering, however, would be conditioned on the issuer being current with ongoing reporting requirements at the time of sale.  The proposed rule would provide for continuous or delayed offerings for the following types of offerings:

  • 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.

In proposing to include the above types of securities/offerings, the SEC 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 proposed rules, changes in the information contained in the offering statement would no longer necessarily trigger an obligation to amend.  Offering circulars for continuous Regulation A offerings would 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 also proposed to 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 “[t]he proposed rules would build on Regulation A to create a regime similar to what is permissible for registered offerings, and would draw from and adapt the language in Rule 424, Item 512 of Regulation S-K, and Rule 430A to do so.”  In this regard, the SEC noted, among other things, that it proposed to allow the use of offering circular supplements for final pricing information where the offering statement is qualified on the basis of a bona fide price range estimate, and that offering circulars would be permitted to omit information with respect to the underwriting syndicate analogous to the provisions for registered offerings under Rule 430A.


Under Regulation A, an offering statement is generally qualified only by order of the SEC, similar to a registration statement being declared effective.  In its release, the SEC proposed to alter the qualification process of existing Regulation A.  As proposed, an offering statement could be qualified only by order of the SEC, and the process associated with the current delaying notation would be eliminated.

Solicitation of Interest (“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.  Existing restrictions on this testing the waters activity have limited its practical value.  Testing the waters could occur only before the offering materials were filed with the SEC for review.  The SEC’s review period often took nine months or more, eroding the value of the initial indications of interest.

To remedy this problem, the proposed rule would permit issuers to use testing the waters solicitation materials both before and after filing an offering statement with the SEC.  An issuer would be required to comply with certain filing and disclaimer requirements, and after filing the offering statement with the SEC, the issuer would be required to provide a copy of or access to the current preliminary offering circular and information on how to obtain the offering statement filed with the SEC.

The proposal would also require an issuer to file its offering statement publicly not later than 21 days before qualification.  Once filed, an issuer and its intermediaries would be 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 would 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 proposed Rule 251(d)(2)(i).

The proposal revises the filing requirements for solicitation materials for Regulation A offerings and would no longer require submission of those materials at or before first use.  As proposed, an amendment to Rule 254 would permit the filing of solicitation material as an exhibit to the offering statement when submitted for non-public review or filed.

Rule 254(b)(2) requires all soliciting material 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 proposal would amend this language to make sales contingent on the qualification of the offering statement, not the delivery of a final offering circular.

Ongoing Reporting

Continuing Disclosure Obligations

The SEC proposed to rescind 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 proposed that substantially the same information would be filed in a single post-termination filing on new Form 1-Z, or on new Form 1-K as part of the issuer’s annual report for Tier 2 filers.

Tier 2 filers would 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 would also be 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 of these reports would be filed electronically on EDGAR.

Annual Reports on Form 1-K

New Form 1-K for Tier 2 issuers would be filed annually and consists of two parts, Part I (Notification) and Part II (Information to be included in the report).

Part I would be an online, fillable 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 would also be filed electronically as a text file attachment containing the body of the disclosure document and financial statements.  Disclosures would 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 would 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 would include unaudited financial information and, like Form 10-Q, would consist primarily of financial statements and an MD&A section.  Form 1-SA would also include updates not otherwise disclosable on Form 1-U (the form for current reports).  Form 1-SA would be filed within 90 calendar days after the end of the issuer’s second fiscal quarter.

Current Reports on Form 1-U

Certain fundamental changes in the issuer that have occurred or that the issuer would reasonably expect to experience would require the issuer to disclose those events 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 securityholders;
  • 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 proposal would 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 would be analogous to those required under Exchange Act Rule 15d-2.

A Form 1-K including audited financial statements would be filed within 120 calendar days after qualification.  Unaudited semiannual financial statements would 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 would continue to file reports for Tier 2 issuers on the same basis as would have been required of the original issuer.  The successor issuer would also have the same suspension or termination rights for reporting obligations as the original issuer, pursuant to proposed Rule 257(d).

Termination of Reporting Obligation

The SEC proposed to permit Tier 2 issuers 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 would be able to 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 300 persons and offers or sales of those securities under Regulation A are not ongoing.

A Tier 2 issuer’s reporting obligation would also 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 proposal would amend Rule 15c2-11 to permit broker-dealers to rely on the ongoing disclosures proposed to be provided by Tier 2 issuers to satisfy the requirements of the rule.

The proposal also requests comment on 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.

Exchange Act Registration of Regulation A Securities

Exchange Act registration of Regulation A securities currently is accomplished by filing Form 10.  Issuers registering a class of securities pursuant to Section 12 of the Exchange Act may use Form 8-A, a short form of registration statement, if they are subject to Section 13 or Section 15 reporting obligations.  The SEC solicited comment on whether to allow Regulation A issuers to use Form 8-A and for other ways to facilitate the secondary market trading of Regulation A securities.

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 exemption.  Those rules must be substantially similar to rules adopted pursuant to Section 926 of the Dodd-Frank Act, which addresses disqualification rules for Regulation D securities offerings.  The SEC adopted those rules earlier this year, and we provided an overview and analysis of those rules in a previous Client Alert.

Rule 262 currently provides for the disqualification of bad actors.  The SEC therefore 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 in the proposed 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, the proposed Rule 262 amendments also include 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, the adequacy of which must be reviewed in April 2014, should be raised.