On March 25, 2015, the SEC adopted final rules to update and expand Regulation A, an existing exemption from registration for smaller issuers of securities. The updated exemption, often referred to as Regulation A+, will permit smaller companies to offer and sell up to $50 million of securities in a 12-month period, subject to eligibility, disclosure and reporting requirements.
The adopted rules will become effective 60 days after publication in the Federal Register. To review the SEC’s adopting release, click here.
Existing Regulation A has provided a rarely used exemption from the registration requirements of the Securities Act of 1933 for securities offerings by small private U.S. and Canadian companies. It essentially allows small private companies to offer freely tradable securities while going through a mini-registration process. Two major drawbacks of the existing Regulation A were that it required companies to register their offerings in every state where securities would be offered and that it limited those offerings to $5 million. The state registration requirements were costly and burdensome and the offerings raised too little capital. The new amendments were adopted to implement Section 401 of the JOBS Act, which was intended to improve access to capital for small businesses.
The final rules implement the mandated rulemaking under the JOBS Act by providing two tiers of offerings: (i) Tier 1, which would consist of securities offerings of up to $20 million in a 12-month period, and (ii) Tier 2, which would consist of securities offerings of up to $50 million in a 12-month period. For offerings of up to $20 million, the issuer could elect whether to proceed under Tier 1 or Tier 2. Both tiers would be subject to basic requirements as to issuer eligibility, disclosure and other matters, drawn from the current provisions of Regulation A. Both tiers would also permit companies to submit draft offering statements on a confidential basis to the SEC before filing, permit the continued use of solicitation materials after filing the offering statement, require the electronic filing of offering materials and otherwise align Regulation A with current practice for registered offerings.
The Regulation A+ exemption would be limited to companies organized in and with their principal place of business in the U.S. or Canada. In general, the following companies would be ineligible to use Regulation A+:
- An issuer that is already an SEC-reporting company;
- An investment company registered or required to be registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of the Investment Company Act of 1940;
- Development stage companies that have no specific business plan or purpose or have indicated their business plan is to engage in a merger or acquisition with an unidentified company; and
- An issuer that is disqualified under the SEC’s “bad actor” disqualification rules.
The adoption of Regulation A+ is another key step in the SEC’s ongoing efforts to facilitate capital formation. While Tier 1 offerings will be subject to both SEC and state review (a significant expense that has generally turned issuers away from Regulation A in the past), Tier 2 offerings will provide for the preemption of state securities law registration, which has the potential to work effectively for capital raises of up to $50 million. In addition, Tier 2 offerings will provide a conditional exemption from Section 12(g) of the Securities Exchange Act of 1934, so that Tier 2 issuers have some breathing room to raise capital and grow without triggering the burden of full SEC reporting requirements.
A summary chart comparing the key provisions of Tier 1 offerings and Tier 2 offerings is presented below.
|Tier 1||Tier 2
|Annual Offering Limit||$20 million, including no more than $6 million on behalf of selling securityholders that are affiliates of the issuer.||$50 million, including no more than $15 million on behalf of selling securityholders that are affiliates of the issuer.|
|Application of State Securities Laws;||No exemption provided.||Preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers,” which is defined to be any person to whom securities are offered or sold in a Tier 2 offering, or where securities are listed on a national securities exchange.|
|Limitations on Investors||No limit.||Investment limit applicable to persons who are not accredited investors.|
|SEC Filing Requirements||
||Same as Tier 1.|
|Solicitation Materials||Issuers may “test the waters” with the general public either before or after the filing of the Offering Circular.||Same as Tier 1.|
|Financial Statement Requirement||
|Ongoing Reporting||Exit Reporting. File on EDGAR an exit report not later than 30 calendar days after termination or completion of an offering.||Annual, Semiannual and Current Reporting. File on EDGAR annual and semiannual reports, as well as current event reports.|