Regulation A+ Remains a Work in Progress
July 20, 2018
To Allow a Larger Number of Companies to Undertake Securities Offerings in Reliance on the Revamped Regulation A, Additional Changes are Forthcoming
Three years after being overhauled, issuers are beginning to take advantage of Regulation A with greater frequency. However, it still remains one of the lesser-used capital-raising tools. One reason for this is that only a few brokerage firms are presently underwriting Regulation A offerings.
To allow a larger number of companies to undertake securities offerings in reliance on the revamped Regulation A, additional changes are forthcoming. Under the Economic Growth, Regulatory Relief, and Consumer Protection Act (Act), which President Donald Trump signed into law on May 24, 2018, the Securities and Exchange Commission (SEC) must again revise Regulation A+, this time to allow public companies to use it to offer securities.
Prior Amendments to Regulation A+
Regulation A allows certain issuers to raise capital without going through the costly process of conducting a registered public offering or complying with the accredited investor and/or solicitation restrictions associated with Rule 506(b) or 506(c) private placements under Regulation D. Issuers are also authorized to gauge investor interest by “testing the waters.”
Despite these benefits, Regulation A remains one of the most infrequently used exemptions to SEC registration. Prior amendments to Regulation A, dubbed “Regulation A+,” now allow smaller companies to offer and sell up to $50 million of securities in a 12-month period. Enacted as part of the JOBS Act, the changes aimed to make the exemption more widely available and to provide small businesses with greater access to capital.
Regulation A+ includes two tiers of securities offerings, each with its separate set of requirements. Tier 1 covers securities offerings of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer. Meanwhile, Tier 2 includes securities offerings of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer.
Notably, Tier 1 still requires the approval from state securities regulators, whereas the rules provide for the preemption of state securities law registration and qualification requirements for Tier 2 securities. In addition to the basic requirements set forth in Regulation A, companies conducting Tier 2 offerings are subject to other requirements. For instance, they are required to provide audited financial statements and file annual, semiannual and current event reports with the SEC. In addition, securities purchases for non-accredited investors are limited to no more than 10 percent of the greater of the investor’s annual income or net worth.
Expansion of Regulation A+
Under the Act, the SEC will again expand the reach of Regulation A. The exemption currently excludes public reporting companies, which means that they must generally rely on fully registered public offerings to raise capital. To increase the number of companies that can take advantage of Regulation A, the Act specifically eliminates the requirement that an issuer not be subject to certain reporting requirements under the Securities Exchange Act of 1934, immediately before an offering.
Because Regulation A offers a streamlined and less costly SEC review process, the new changes are welcome news for companies seeking to raise capital. For companies conducting Tier 2 offerings, the exemption also allows companies to bypass state blue sky review. Under the Act, the periodic reports filed by public reporting companies would be deemed to meet the reporting and disclosure requirements under a Tier 2 offering.
The latest changes do not take effect immediately. Rather, the Act requires the SEC to enact amendments to Regulation A to implement its provisions. We expect to see an increased number of brokerage firms underwriting Regulation A offerings when the new changes take effect. We will continue to track the process of the regulatory changes and post updates as they become available.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work at 201-806-3364.