On March 25, 2015, the Securities and Exchange Commission adopted amendments to Regulation A (“Regulation A+”), expanding the Regulation A exemption from Securities Act registration for public offerings up to $50 million in any 12-month period, as mandated by Title IV of the JOBS Act. The full text of the Regulation A+ adopting release is available here, and the provisions of the JOBS Act are more fully discussed in our JOBS Act client alert, availablehere.
Regulation A+ provides what SEC Chairman Mary Jo White calls “an effective, workable path to raising capital” by, among other things: (i) creating two new tiers of exempted offerings (“Tier 1” offerings, up to $20 million, and “Tier 2” offerings, up to $50 million), (ii) modernizing the filing, reporting, and information delivery requirements of Regulation A, and (iii) preempting state blue sky laws for certain “testing the waters activities” and for Tier 2 offerings. The rules also aim to enhance investor protection through new issuer eligibility exclusions and disclosure requirements. Securities sold under Regulation A+ are not considered “restricted securities” under the Securities Act, and are thus not subject to transfer restrictions.
Regulation A+ will become effective 60 days after publication in the Federal Register.
Regulation A+ Overview
Regulation A+ provides an exemption from the registration requirements of Section 5 of the Securities Act for certain offers and sales of securities that are “qualified” with the SEC. To satisfy the exemption contained in Regulation A+, an offering must meet the following requirements:
Tiers of Offerings
Regulation A+ expands the existing Regulation A exemption into two separate categories:
- Tier 1, which effectively replicates the existing exemption by permitting offerings of up to $20 million in any 12-month period (including up to $6 million on behalf of selling securityholders), subject to certain minor revisions; and
- Tier 2, which allows offerings up to $50 million in a 12-month period (including up to $15 million on behalf of selling securityholders), subject to significant additional reporting requirements.
Issuers may elect to offer securities under either Tier 1 or Tier 2 if the offering is $20 million or less.
Prior to the adoption of Regulation A+, Regulation A was only available to U.S. and Canadian entities that were not: (i) subject to Section 13 or 15(d) of the Exchange Act immediately before the offering; (ii) development stage companies with no specific business plan or purpose, or if such plan is to merge with an unidentified company; (iii) investment companies registered or required to be registered under the Investment Company Act; (iv) issuing fractional undivided interest in oil or gas rights; or (v) subject to certain “bad actor” disqualifications. The exemption continues to be unavailable to these issuers under Regulation A+.
Regulation A+ also makes the exemption unavailable to issuers that:
- have failed to file any of the ongoing reports required by Regulation A+ in the two years immediately preceding the filing of a new offering statement; and
- are or have been subject to an SEC order denying, suspending, or revoking the registration of a class of securities under the Exchange Act that was entered within five years before the filing of the offering statement.
Finally, Regulation A+ revises the “bad actor” disqualification provisions of Rule 262 to match Rule 506(d) under Regulation D.
Regulation A is only available for the offer and sale of equity securities, debt securities, and debt securities convertible or exchangeable into equity interests, including any guarantees of such securities. Regulation A+ adds an exclusion for asset-backed securities.
Offering Disclosures -- Form 1-A
Regulation A+ retains Form 1-A’s current structure: Part I (the Notification), Part II (the Offering Circular), and Part III (Exhibits). However, the revised form eliminates one of the disclosure alternatives of Part II, “Model A”, while preserving and updating disclosure alternative “Model B.” The disclosure required under Model B is similar to, but less onerous than, what is required in a registered offering, and includes disclosure of:
- the offered securities;
- director and officer compensation;
- material risks;
- use of proceeds;
- business overview;
- management’s discussion and analysis of result of operations;
- beneficial ownership information;
- related party transactions; and
- two years of financial statements, dated not more than 9 months before the date of submission.
For Tier 1 offerings, financial statements need not be audited unless an issuer has prepared audited financial statements for some other purpose. Tier 2 offerings must include financial statements that are audited in accordance with PCAOB standards.
Regulation A did not contain any limits on the amounts of securities that may be purchased by an individual investor. Under Regulation A+, this continues to be the case for Tier 1 offerings.
However, Regulation A+ does impose investment limits for Tier 2 offerings. Purchasers in Tier 2 offerings must either be accredited investors (as defined in Rule 501 of Regulation D), or limit their investment to no more than (i) 10% of the greater of either the investor’s annual income or net worth or (ii) 10% of the greater of annual revenue or net assets at fiscal year-end. These limitations do not apply to purchases of securities that will be listed on a national securities exchange upon qualification. Issuers are required to make investors aware of the investment limitations, but, in the absence of actual knowledge to the contrary, may be able to rely on an investor’s representation that such investor is in compliance with the investment limitations.
Ongoing Reporting Obligations
Previously, Regulation A did not require any ongoing reporting by an issuer other than the filing of a Form 2-A to report on sales in the offering and the termination of the offering. Regulation A+ replaces Form 2-A with Form 1-Z and establishes two different reporting regimes for issuers conducting offerings under Tier 1 and Tier 2, respectively.
Tier 1 Reporting Obligations
Issuers conducting Tier 1 offerings are required to provide summary information regarding sales activities and the termination of the offering under Form 1-Z, which is due not later than 30 calendar days after the termination or completion of a Tier 1 offering.
Tier 2 Ongoing Reporting Obligations
Issuers conducting Tier 2 offerings are subject to ongoing reporting obligations, including:
- annual reports on Form 1-K (including disclosure concerning the issuer itself, the offering, the issuer’s business, related party transactions, and two years of audited financial statements, among other things);
- semiannual reports on Form 1-SA (including disclosure similar to that required on Form 10-Q, but without disclosures on market risk, risk factors, or controls and procedures, among others); and
- current reports on Form 1-U (including disclosure of material events such as fundamental business changes, changes in certifying accountant, bankruptcy, and others).
Exchange Act Reporting under Section 12(g)
Section 12(g) of the Exchange Act requires an issuer to register a class of securities, and begin periodic reporting under the Exchange Act thereafter, within 120 days after the last day of its first fiscal year ended on which such issuer has total assets exceeding $10 million and has a class of securities held of record by either (i) 2,000 persons or (ii) 500 persons who are not accredited investors.
As adopted, Regulation A+ exempts securities issued in a Tier 2 offering from the Section 12(g) threshold, as long as the issuer (i) remains subject to and is current in its Regulation A+ reporting obligations as of its fiscal year end, (ii) engages the services of a registered transfer agent, and (iii) either has a public float of less than $75 million as of its most recently completed semiannual period or annual revenues of less than $50 million as of its most recently completed fiscal year.
State Law Requirements
Regulation A+, at long last, provides a definition of “qualified purchaser” under Section 18(b)(3) of the Securities Act, thus preempting state law with regard to the registration of certain offers and sales conducted under Regulation A+. Rule 256 states that, for purposes of Section 18(b)(3) of the Securities Act, a “qualified purchaser” of a security offered or sold pursuant to Regulation A+ means any person to whom securities are offered or sold in a Tier 2 offering.
The manner in which this proposed definition affects each offering tier is discussed below.
Tier 1 Offerings -- State Law Requirements
Similar to Regulation A offerings, an issuer who chooses to conduct a Tier 1 offering under Regulation A+ will be subject to the registration requirements of each state in which the issuer offers and sell securities. Currently, many states partake in the CR-SCOR coordinated review process when reviewing Regulation A offerings, and NASAA has proposed an additional, more streamlined process.
Tier 2 Offerings -- State Law Requirements
Issuers who conduct offerings pursuant to Tier 2 of Regulation A+ will not be subject to the registration or review requirements of the states in which they desire to offer and sell securities.
Testing The Waters
Regulation A+ fundamentally alters the way in which testing the waters activities are conducted by:
- preempting state law with regard to testing the waters activities, by including in the definition of “qualified purchaser” any offeree of a security offered pursuant to Regulation A; and
- allowing issuers to test the waters either before or after the filing of a Form 1-A, subject to compliance with certain disclaimer and filing requirements.
Rule 251 of Regulation A provided certain safe-harbors from integration. Regulation A+ adds a safe-harbor for subsequent offers and sales of securities conducted pursuant to Regulation Crowdfunding (for a fuller discussion of Regulation Crowdfunding, please see our prior client alert here).
In addition, Regulation A+ amends Rule 254(d) to exempt from integration any registered offerings after the issuer conducted testing-the-waters activities pursuant to Regulation A+, unless the issuer solicited nonqualified institutional buyers or non-accredited institutional investors, in which case the issuer would need to observe a 30-day cooling off period between the last solicitation of interest pursuant to Regulation A+ and the filing of the registration statement with the SEC.
Modernization of Filing and Qualification Process
Previously, issuers relying on Regulation A were required to submit seven printed copies of the Form 1 A and amendments thereto to the File Desk each time an issuer filed with the SEC. Regulation A+ modernizes this process by requiring that issuers file Forms 1-A, and any other forms or correspondence required to be filed with the SEC, electronically via EDGAR.
In addition, similar to the process for emerging growth companies preparing for an initial public offering, the adopted rules permit the confidential submission of a Form 1-A for first-time offerings under Regulation A+. The adopted rules also require the confidential submission, subsequent confidential amendments, and SEC correspondence to be publicly filed as exhibits to the offering statement not later than 21 calendar days before the qualification of the Form 1-A.
Regulation A+ also modernizes the qualification and delivery process. During the prequalification period, Regulation A+ requires that issuers and intermediaries deliver a preliminary offering circular to prospective purchasers at least 48 hours in advance of sale, unless the issuer is subject to and current in Tier 2 ongoing reporting obligations. Issuers subject to and current in Tier 2 reporting obligations will only be required to comply with general delivery requirements for offers.
During the qualification period, issuers and intermediaries may satisfy their delivery requirements pursuant to an “access equals delivery” model when sales are made on the basis of offers conducted during the prequalification period, and where the final offering circular is filed and available on EDGAR. Issuers and intermediaries are also required to provide purchasers with a copy of the final offering circular or a notice with the uniform resource locator (URL) to the final offering circular on EDGAR, as well as contact information sufficient to notify a purchaser about where a request for a final offering circular can be sent, not later than two business days after completion of a sale. During the post-qualification period, issuers may file updates and supplements to the offering statement in lieu of post-qualification amendments under certain circumstances.