Another letter to the SEC from the Hill challenges the Regulation A+ proposal. This time, the authors question the authority of the SEC in defining “qualified purchaser” as an offeree or purchaser in a Tier 2 Reg A+ offering. The letter (available here: http://www.nasaa.org/wp-content/uploads/2014/08/Senate_Regulation-A-Letter-FINAL-08-01-14.pdf) suggests that the SEC through the approach taken in its proposal ignores investor protection concerns. This seems odd. Investor protection always has been premised on a disclosure regime. The SEC’s Reg A+ proposal sets quite a high bar for Tier 2 Reg A+ offerings, such as incorporating in the proposal:
- substantially enhanced requirements for information to be set forth in an offering statement to be reviewed and qualified by the SEC;
- the requirement to post the offering statement on EDGAR, thus making it available for review by the public;
- a requirement for issuers in a Tier 2 offering to include audited financial statements in their offering statements;
- a requirement for all Regulation A issuers to file balance sheets for the two most recently completed fiscal year ends (or for such shorter time that they have been in existence);
- ongoing reporting requirements for Tier 2 issuers;
- an update of the restrictions on issuer eligibility to exclude from Regulation A those 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 an offering statement; and
- an update of the “bad actor” disqualifications to be consistent with the disqualifications under Rule 506(d) under the Securities Act.
It is difficult to reconcile the statements in the letter with the text of the SEC’s proposal. It is also unclear why the authors of the letter would take the view that the SEC’s review of an offering statement would be insufficient and that it should be accompanied by state review. Or, why the authors of the letter believe that the requirements of a national securities exchange are central to the investor protection mission. It is true that the exchanges have corporate governance requirements for listed companies; however, the exchanges do not impose particular disclosure requirements for listed companies—however, the SEC’s proposal for Tier 2 issuers would impose specific, detailed ongoing reporting requirements.
An issuer that chooses to undertake a Tier 2 Regulation A+ offering will have determined that it is prepared to incur the expenses associated with preparing the requisite offering statement and the financials, as well as the subsequent ongoing reporting. It is unlikely that an issuer that chooses to use Tier 2 of Reg A+ will be conducting a “local” offering and soliciting principally individuals in its surrounding area. That would be inefficient and is simply quite improbable. Perhaps the more important question to consider is why we would want to structure an approach that encourages issuers to rely on Rule 506, which does not include a disclosure requirement, instead of encouraging reliance on Tier 2 of Regulation A+.