The SEC recently adopted rules to allow companies to raise up to $50 million by offering and selling securities through a new exemption, without filing a registration statement. The rules, commonly referred to as “Regulation A+,” were issued under Section 3(b) of the Securities Act of 1933 and will become effective on June 19, 2015. The new rules and the Regulation A+ adopting release can be found here: (the “A+ Adopting Release”).
Regulation A+ (or “A+”) implements Title IV of the JOBS Act and is a substantially expanded version of Regulation A, an existing (but little-used) exemption from registration under the Securities Act for smaller issuances of securities. The new A+ rules create two tiers of offerings, Tier 1 and Tier 2. Some of the more significant elements of A+ are summarized below.
Tier 1 will allow offerings of up to $20 million in a 12-month period, with no more than $6 million of sales by selling securityholder affiliates. Tier 2 will allow offerings of up to $50 million in a 12-month period, with no more than $15 million of sales by selling securityholder affiliates. In the case of an issuer’s first offering pursuant to Regulation A+ and any subsequent A+ offering qualified within one year thereafter, sales by any selling securityholders (regardless of affiliation with the issuer) are limited to 30% of each offering.
If convertible securities or warrants are included in the A+ offering and may be converted, exercised or exchanged for other issuer securities within one year of the A+ offering or at the discretion of the issuer, the full value of those derivative securities will be considered issued in the A+ offering and their aggregate value will use up the relevant offering limit value of Tier 1 or Tier 2, as applicable.
Tier 1 and Tier 2 offerings must be made through an offering statement on Form 1-A, which must be filed with the SEC via EDGAR. The SEC remarked in the A+ Adopting Release that disclosure on Form 1-A is “akin to what is required of smaller reporting companies in a prospectus for a registered offering.” Of particular note, Form 1-A requires (1) disclosure concerning material disparities between the A+ offering price and the cost of shares purchased by insiders in the preceding year, (2) annual financial statements for two full years (or since inception, if for a lesser period) and for applicable interim periods and (3) disclosure of business operations for the past three years (or since inception, if for a lesser period).
In connection with the larger permitted offering size, Tier 2 imposes requirements upon issuers beyond those set forth in Tier 1. For instance, in a Tier 2 offering, issuers must provide audited financials prepared in accordance with U.S. GAAS or standards issued by the PCAOB. In either case, the Tier 2 issuer's auditor must be independent under Rule 2-01 of Regulation S-X, but need not be PCAOB-registered. In contrast, Tier 1 issuers may file unaudited financial statements on Form 1-A so long as the issuer has not obtained audited financial statements for another purpose (e.g., as required under commercial loan agreement obligations).
Unlike other exempt private placements, A+ offerings are subject to liability under Section 12(a)(2) of the Securities Act. As a result, liability obligations could arise in the event A+ offering materials or oral communications include a material misleading statement or material omission.
After an A+ offering, Tier 2 issuers must file annual, semiannual and current reports. Compared to traditional Exchange Act reporting companies, however, Tier 2 issuers have a less burdensome post-offering reporting obligation associated with these filings. In contrast, Tier 1 issuers are not subject to annual, semi-annual or current report filing obligations. As a general proposition, full Exchange Act reporting obligations could arise when an issuer has assets exceeding $10 million and exceeds certain levels of stockholders of record or non-accredited investors. For Tier 2 issuers that otherwise could cross into full Exchange Act reporting obligations through an A+ offering by surpassing shareholder triggers for Exchange Act reporting, a conditional exemption from registration under Section 12(g) of the Exchange Act of 1934 has been implemented as part of the A+ Adopting Release, provided, among other things, the issuer uses a registered transfer agent, the issuer complies with ongoing reporting obligations under A+, and the issuer has less than $50 million in annual revenues or less than $75 million in public float as of relevant measurement dates.
State Law Coordination
One of the key features of Regulation A+ is that qualification and registration under state securities laws (i.e., blue sky laws) are preempted for Tier 2 offerings only. It is expected that this aspect of A+ should enable more widespread use for issuers than the previous iteration of Regulation A, because a common complaint and deterrent of issuers considering Regulation A offerings had been the difficulty in navigating state blue sky laws. Tier 1 offerings, on the other hand, will still require blue sky review. States also retain jurisdiction to investigate and prosecute fraud, require “notice filings” of documents filed with the SEC, charge filing fees, and suspend offerings within a given state to enforce notice and fee requirements, in each case for both Tier 1 and Tier 2 offerings.
The following chart recaps the most critical components of the foregoing provisions of A+:
Click here to view the table.
* Subject to the following additional limitation in the one-year period commencing with the issuer's first offering qualification under A+: the portion of each offering attributable to the aggregate value of affiliate and non-affiliate selling shareholders' shares cannot exceed 30% of the aggregate offering.
In a Tier 2 offering, a non-accredited investor generally is limited to purchasing no more than ten percent of either the investor’s net worth or annual income, whichever is greater, while accredited investors are not subject to those limits. There are no express federal investor investment limits for Tier 1 offerings under A+, but as a practical matter, Tier 1 offerings may entail investor limitations as a by-product of applicable state blue-sky regulatory regimes that can impose their own investor limits, depending upon the jurisdictions where securities are being offered or sold.
Who’s Eligible for A+?
The SEC has narrowed the field of issuers eligible for Regulation A+ offerings. Among other things, an issuer under Regulation A+ must have its principal place of business in the United States or Canada. There are a number of exclusions, as well. Perhaps most importantly, it is not available to companies that are already Exchange Act reporting companies. Further, an A+ eligible issuer cannot be: a registered investment company; a development stage “blank-check” shell company; an issuer whose Exchange Act registration has been revoked or suspended within the preceding five years; or an issuer that has not filed ongoing reports required by A+ during the preceding two years. Regulation A+ also expanded the “bad actor” disqualification in existing Rule 262 to match the new “bad actor” provisions in Regulation D.
Another key facet of an A+ offering is that it allows potential issuers to “test the waters” before the offering. This enables issuers to solicit interest in a potential offering from the general public before filing an offering statement with the SEC. This is more beneficial than many other exempt offerings (where general public solicitation is generally prohibited) and emerging growth company (“EGC”) public offerings, where solicitation is limited to sophisticated QIBs and institutional investors. “Test the waters” materials need not be submitted to the SEC prior to use, but ultimately must be filed with the SEC in connection with the filing of the issuer’s offering statement.
Confidential SEC Filing Benefits of A+
As long as an issuer has not previously sold securities pursuant to an A+ offering, it is able to confidentially furnish non-public offering statements and amendments for SEC staff review before publicly filing them with the SEC, provided that all of those documents are publicly filed at least 21 days before the offering circular is qualified by the SEC. However, A+ non-public materials do not have the same confidentiality protections as those associated with EGC submissions, and it is possible that A+ non-public materials may be available to the public in certain circumstances through FOIA requests.
A+ Takeaways and Tips
While the A+ rules are generally favorable, many practitioners and some of the SEC’s commissioners have expressed regret that A+ did not do more to facilitate capital formation. As a result, there are important takeaways not only for the A+ offering process, but also for post-offering secondary trading of shares.
Tier 1 capital raising, with its deference to state securities commission review, is likely to be inefficient and prone to the same negative complexities that led to the old Regulation A rarely being used over recent decades. As a result, presently there appears to be little advantage to using Tier 1 over other alternative exemptions from registration currently available, including Rule 506 under Regulation D.
While Tier 1 A+ offerings appear to provide little current utility, there is no restriction within A+ for completing Tier 2 offerings involving offering proceeds of less than $20 million. Thus, state preemption may be available for smaller offerings as long as issuers are willing to comply with all the requirements of Tier 2, including audited financial statement requirements, investor limits and post-offering reporting requirements. While much remains to be seen regarding how A+ offerings will be embraced by the markets and regulators alike, the use of Tier 2-compliant A+ offerings may ultimately prove to be an effective way to raise less than $20 million in an exempt offering under the federal securities laws.
Finally, it is worth nothing that the A+ Adopting Release specifically stated that the SEC consciously chose not to fully preempt state regulation over secondary trading of shares issued in Tier 2 offerings. Moreover, it reserved the SEC's ability to review market developments for purposes of implementing potential future rule changes that could affect both primary and secondary A+ markets. In this regard, it is worth emphasizing that while the Tier 2 exemption preempts state regulation of issuances and resales of shares within the contours of an A+ offering, subsequent (i.e., post-A+) resales of shares should be planned with a careful eye to ensure compliance with state securities laws. In addition, there are federal limitations associated with certain resales outside of an A+ offering. As a consequence, advance planning consideration should be given to (1) judicious use of shares that are sold by selling stockholders in an issuer’s initial qualification of shares through A+, (2) the subsequent use of continuous offering statements for selling shareholders, particularly affiliates, and (3) the availability of state and federal exemptions for secondary trading of other shares outside of an A+ offering.