Earlier this month, the House of Representatives approved in a landslide vote the Improving Access to Capital Act (HR 2864), which would extend the use of Regulation A, an exemption from registration under the Securities Act, to public companies.
What Is Regulation A?
Regulation A is an exemption from registration under the Securities Act which allows smaller, early stage companies to raise capital in an alternative manner than a traditional initial public offering. Regulation A was expanded in connection with the enactment of Title IV of the Jumpstart Our Business Startups Act of 2012 (often referred to as Regulation A+) to increase the offering allowance from $5 million to $50 million and allow companies to raise money under two tiers.
Under Tier 1, a company can raise up to $20 million in any 12-month period and is not subject to ongoing reporting requirements. A Tier 1 offering is conducted pursuant to an offering circular that is subject to prior review and qualification by the Securities and Exchange Commission as well as state securities regulators. There are no limitations on investments by nonaccredited investors under a Tier 1 offering. To make Tier 1 more practical, state regulators have created a “coordinated review” process whereby one state reviews all Tier 1 offerings on behalf of all states (currently the state of Washington).
Under Tier 2, a company can raise up to $50 million in any 12-month period, but is subject to ongoing reporting requirements that are less comprehensive than those applicable to reporting companies. A Tier 2 offering is conducted pursuant to an offering circular that is subject to prior review by the SEC, but not by state securities regulators. If securities offered in a Tier 2 offering will not be listed on a national securities exchange upon qualification, a nonaccredited investor is subject to certain investment limitations. Unlike Tier 1 offerings, Tier 2 issuers must have audited financial statements as of a balance sheet date not older than nine months.
Effect of the New Legislation
Under the existing Regulation A, public reporting companies are excluded, leaving them to raise capital through fully registered public offerings, which can be costly and time-consuming if the company is not eligible to use a shelf registration statement or incorporate information by reference under Form S-3. Public companies can also raise capital through private placements, but this is usually tied to an acquisition or other corporate transaction, or through follow-on public offerings or PIPE (private investment in public equity) transactions, but these are generally sold at a discount to market price and can be highly dilutive to a company’s stock price.
The new legislation, sponsored by Representative Kyrsten Sinema (D-AZ), would amend Regulation A to permit existing SEC public reporting companies to rely on Regulation A to raise capital, and the periodic reports filed by such companies would be deemed to meet the reporting requirements under a Tier 2 offering. Moreover, public companies would be able to raise capital through alternative securities that might be less dilutive to the listed security, including via preferred stock, debt securities and through special-purpose vehicles. If enacted, the Improving Access to Capital Act would provide SEC public reporting companies with a level playing field to private companies in utilizing Regulation A and additional avenues by which to raise capital.