Last week, the Securities and Exchange Commission (“SEC”) adopted final rules1 amending Regulation A (referred to as “Regulation A+”) under the Securities Act of 1933, as amended (the “Securities Act”), as mandated by the Jumpstart Our Business Startups (“JOBS”) Act. The new rules, which are part of the government’s efforts to give private companies greater access to capital, will expand and modernize existing Regulation A by providing new registration exemptions for privately-held companies making securities offerings of $50 million or less within a 12-month period. Regulation A+ will also allow companies to “test the waters” by using preliminary sales literature either before or after filing an offering statement to determine whether there is interest in their proposed offerings, provided that any sales literature used after publicly filing an offering statement is preceded or accompanied by a preliminary offering circular, or contains information as to where prospective investors can obtain a preliminary offering circular. Regulation A+ offerings remain subject to the antifraud and other civil liability provisions of the federal securities laws.
The new rules provide for two tiers of offerings: Tier 1 offerings may raise up to $20 million of securities in a 12-month period, and Tier 2 offerings may raise up to $50 million of securities in a 12-month period. Companies issuing up to $20 million of securities may choose whether to proceed under Tier 1 or Tier 2. The discussion below summarizes key terms of the new Regulation A+ rules.
Tier 1 Requirements
Under the new rules, a Tier 1 offering may raise up to $20 million (increased from $5 million in the SEC’s earlier proposal) of securities in a 12-month period. Small companies may find a Tier 1 offering attractive because there are no limitations or restrictions on investors or on resale of the company’s securities, except that the total securities sold by an affiliate security-holder generally may not exceed 30% of the aggregate offering (e.g., for a $20 million offering, not more than $6 million may be sold by affiliate security-holders of the company). Additionally, registration requirements are less onerous than for Tier 2; a Tier 1 issuer must file a Form 1-A (“Offering Circular”), a current balance sheet and income statements for the previous two fiscal years with the SEC via EDGAR. There are no ongoing reporting obligations under a Tier 1 offering other than to file exit reports. However, Tier 1 offerings have drawbacks with respect to state securities laws. Tier 1 offerings are not federally preempted, and thus are subject to potentially time-consuming and costly state “blue sky” registration requirements. Nevertheless, the North American Securities Administrators Association (“NASAA”) has recently implemented a coordinated review program, which seeks to reduce the time and cost associated with state registration, and to streamline the registration process for a companies offering securities across multiple states.
Tier 2 Requirements
Tier 2 issuers may raise up to $50 million of securities in a 12-month period. Like Tier 1 offerings, the total securities sold by an affiliate security-holder may not exceed 30% of the aggregate offering. However, unlike Tier 1, Tier 2 offerings do impose limitations on securities offered to non-accredited investors. Specifically, offerings to non-accredited investors under Tier 2 are limited to no more than 10% of the greater of the investor’s annual income or net worth, if the investor is a natural person, and to no more than 10% of the greater of annual revenue or net assets at fiscal year end, if the investor is a non-natural person. Companies are required to notify prospective investors of the investment limitation, but investors will be able to self-certify their income or net worth. Although not as extensive as those for public companies, Tier 2 offerings also impose heightened disclosure and registration requirements, as well as ongoing reporting obligations. Specifically, in addition to the Tier 1 registration requirements, Tier 2 issuers must provide audited financials in accordance with GAAP, and must publicly file annual, semiannual and current event reports with the SEC via EDGAR. Despite the burden of the increased filing requirements, however, companies may find a Tier 2 offering attractive because it provides federal preemption. Thus, unlike Tier 1, companies under a Tier 2 offering will not be required to register under multiple states’ blue sky laws.
The new rules will provide exemptions for privately-held companies in the United States or Canada that seek to offer equity securities, debt securities and securities convertible or exchangeable into equity interests. Companies already required to file on-going reports with the SEC and certain other specified types of companies will not be eligible to rely on the Regulation A+ exemption.2
The rules will become effective 60 days after publication in the Federal Register (June 2015). As required by the JOBS Act, the SEC will review the Tier 1 and Tier 2 offering limitations every two years.