Later this month, new rules will make it easier for smaller companies to access capital. The new rules, referred to as “Regulation A+, were adopted earlier this year by the Securities and Exchange Commission (“SEC”) to amend and expand the exemption for public offerings afforded by Regulation A under the Securities Act of 1933, as amended (the “Securities Act”), as mandated by the Jumpstart Our Business Startups Act (the “JOBS Act”). Effective June 19, 2015, Regulation A+ provides an exemption for U.S. and Canadian companies that are not required to file reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to raise up to $50 million within a 12-month period.
The existing Regulation A is rarely used by issuers primarily because of the low offering size limit ($5 million within a 12-month period), the relatively rigorous disclosure requirements, and the requirement to comply with state blue sky laws. But Regulation A+ has the potential to become an important capital raising alternative for small or emerging companies. This bulletin highlights the primary provisions of Regulation A+.
The Regulation A+ exemption will be available to issuers organized in and having their principal place of business in the United States or Canada. The following issuers, however, will be “ineligible” to offer or sell securities under Regulation A+:
- Companies already subject to ongoing reporting requirements under the Exchange Act;
- Companies registered or required to be registered under the Investment Company Act of 1940 (including business development companies);
- 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;
- “Bad actors” disqualified under Security Act Rule 262;
- Issuers that are required to file, but have not filed, the ongoing reports required by the existing Regulation A during the two years immediately preceding the filing of a new offering statement; and
- Issuers that are or have been subject to an SEC order denying, suspending or revoking the registration of a class of securities pursuant to Section 12(j) of the Exchange Act within five years before the filing of the offering statement.
Offering Limitations and Secondary Sales
Regulation A+ creates two tiers of securities offerings:
Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling securityholders that are affiliates of the issuer; and
Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling securityholders that are affiliates of the issuer.
Companies issuing up to $20 million of securities may choose whether to proceed under Tier 1 or Tier 2. Notably, sales by selling securityholders in an issuer’s initial Regulation A+ offering and any subsequently qualified Regulation A+ offering within the 12-month period following the initial offering cannot exceed more than 30% of the aggregate offering price. As discussed below, the tiered approach not only gives issuers more flexibility in raising capital but also scales certain regulatory requirements based on offering size.
Limitations on Investors
Compared to Rule 506 of Regulation D, Regulation A+ offerings potentially have a broader investor base. Issuers relying on Regulation A+ offerings can sell securities to an unlimited number of non-accredited investors except that non-accredited investors in Tier 2 offerings are subject to an investment limitation. 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.
Exemption from Section 12(g) Registration
The Exchange Act Section 12(g) requires, among other things, that an issuer with total assets exceeding $10,000,000 and a class of equity securities held of record by either 2,000 persons, or 500 persons who are not accredited investors, register such class of securities with the SEC. Regulation A+ provides a conditional exemption for securities issued in a Tier 2 offering from this registration requirement. In order for this exemption to apply, a Tier 2 issuer must engage the services of a transfer agent, remain subject to Tier 2 reporting obligations, be current in its reports and have a public float of less than $75 million or, in the absence of a float, revenue of less than $50 million in the most recently completed fiscal year.
Testing the Waters
Regulation A+ permits issuers to “test the waters” with all potential investors and use solicitation materials both before and after the offering statement is filed, subject to issuer compliance with the rules on filing and disclaimers, as long as any solicitation materials used after publicly filing the offering statement are preceded or accompanied by a preliminary offering circular, or contain information as to where prospective investors can obtain the most current preliminary offering circular. The timing is similar to the “testing the waters” permitted for emerging growth companies (“EGCs”) under the JOBS Act, which can also be conducted both before and after filing of a registration statement. The JOBS Act, however, only permits EGCs to test the waters with qualified institutional buyers or institutions that are accredited investors. Note that solicitation materials will remain subject to the antifraud and other civil liability provisions of the federal securities laws.
Filing and Delivery Requirements
An issuer that seeks to rely on Regulation A+ must file and qualify an offering statement on Form 1-A via the SEC’s Electronic Data Gathering, Analysis and Retrieval system (EDGAR). Although Tier 2 allows for more significant amounts of capital to be raised than Tier 1, more reporting and disclosure requirements are associated with Tier 2 offerings. Tier 2 issuers must provide audited financials in accordance with GAAP in their offering documents, and will be subject to ongoing reporting requirements. Tier 2 issuers would be required to file annual reports, semiannual reports, current event reports, special financial reports and exit reports with the SEC via EDGAR. Tier 2 issuers may terminate or suspend their ongoing reporting obligations on a basis similar to the provisions for suspension or termination of reporting requirements for Exchange Act filers. The financial statements filed in a Tier 1 offering are not required to be audited unless the issuer has already obtained an audit of its financial statements in accordance with GAAP for other purposes. In addition, there are no ongoing reporting obligations under a Tier 1 offering other than filing exit reports with the SEC after termination or completion of the offering. Regulations A+ adopts an “access equals delivery” model for the final offering circulars. Where sales of Regulation A+ securities occur after qualification on the basis of offers made using a preliminary offering circular, issuers and intermediaries may satisfy their delivery requirements for the final offering circular by filing it on EDGAR.
Both Regulation A+ and the JOBS Act permit confidential review. Under Regulation A+, an issuer that has not previously filed a qualified offering statement under Regulation A or a registration statement under the Securities Act may submit a draft offering statement to the SEC for confidential review, provided all such documents are publicly filed as exhibits to the offering statement not less than 21 days before qualification. Unlike EGCs in registered offerings pursuant to the JOBS Act, which must publicly file any confidential submissions not later than 21 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.
Restriction on Resale
In contrast to Rule 506 of Regulation D, the securities in Regulation A+ offerings will not be restricted securities for purposes of the federal securities laws. As a result, sales of the securities by persons who are not affiliates of the issuer would not be subject to any transfer restrictions under Securities Act Rule 144. However, because the securities in a Regulation A+ offering may not be listed or quoted on a securities exchange without registration under Section 12 of the Exchange Act, there may not be a liquid market for these securities.
Tier 1 offerings are not federally preempted, and thus are subject to potentially time-consuming and costly state blue sky registration requirements. All investors in Tier 2 offerings will be “qualified purchasers,” and therefore, state securities law registration and qualification requirements are preempted for securities offered or sold in Tier 2 offerings.