SEC Releases Proposed Rules on Regulation A-Plus

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In yet another effort to display Congress' commitment to the "democratization of access to capital," the Securities and Exchange Commission (the "SEC") has proposed rule amendments to Regulation A under the Securities Act of 1933 (the "Securities Act"), an existing exemption from SEC registration for small public offerings of securities. The proposed rules were released by the SEC on December 18, 2013 under Title IV of the Jumpstart Our Business Startups Act (the "JOBS Act"), and are commonly referred to as "Regulation A-Plus." These proposed rules seek to facilitate capital raises by small businesses and emerging companies by increasing the amount of securities that may be offered in a 12-month period and making compliance with the terms of the Regulation A exemption quicker, less burdensome and less expensive.

Regulation A currently allows a company to raise capital through a public offering of up to $5 million of a company's shares within any 12 consecutive month period without registration with the SEC by (1) filing for SEC staff review an offering statement on Form 1-A that includes an offering circular and company financial statements (either audited or unaudited), (2) providing the offering circular to investors and (3) complying with the securities laws of each state touched by the offering, unless a state exemption applies. According to a study by the U.S. Government Accountability Office, in recent years the exemption under Regulation A has seldom been used by small businesses because of a number of factors, including the type of investors that businesses sought to attract, the process of filing the offering with the SEC, state securities law compliance requirements, and the cost-effectiveness of Regulation A relative to other SEC exemptions. [1]

The proposed rules create two tiers of Regulation A offerings: the first tier for offerings of up to $5 million and the second tier for offerings of up to $50 million, in each case, within a 12-month period. Eligible securities include equity securities, debt securities and debt securities exchangeable for or convertible into equity securities, but exclude asset-backed securities. Securities sold in Regulation A offerings are not restricted securities and, therefore, would not be subject to transfer restrictions in subsequent sales.

For both tiers of Regulation A offerings, the proposed rules:

  • contain issuer eligibility requirements that exclude those companies that are (a) subject to ongoing reporting requirements under the Securities Exchange Act of 1934, (b) registered or required to be registered under the Investment Company Act of 1940, (c) blank check companies, (d) issuers of certain oil, gas, and other mineral rights, (e) considered "bad actors" or (f) not in compliance with reporting requirements [2];
  • do not limit the type of investor that may be solicited;
  • permit companies to submit draft offering statements for nonpublic SEC review prior to filing;
  • allow companies to "test the waters" by distributing limited solicitation materials both before and after filing of the offering statement;
  • modernize the communications and offering process in Regulation A to reflect analogous provisions of the Securities Act registration process, including requiring electronic filing of offering materials (including materials other than the offering circular, which are also permitted) with the SEC; and
  • require that a preliminary offering circular be delivered to prospective purchasers at least 48 hours in advance of a sale, but electronic filing would allow the issuer to utilize the "access equals delivery" model to satisfy its obligation to deliver a final offering circular when it is available on EDGAR.

The proposed rules also make some changes to the required content of the Form 1-A offering statement, which contains the offering circular and other information that an issuer must file with the SEC, most notably to require audited financial statements for Tier 2 offerings. Issuers in Tier 2 offerings would also become subject to ongoing requirements to produce and file with the SEC annually audited financial statements, annual and semiannual reports and current event updates. The proposed rules would limit the amount of securities an investor could purchase in a Tier 2 offering to no more than 10 percent of the greater of the investor's annual income and net worth.

Companies conducting Regulation A offerings currently remain subject to state securities laws. The proposed rules would preempt state law only for Tier 2 offerings.

The proposed rules are now subject to a 60-day public comment period. The enhanced Regulation A exemption may become effective as early as the spring of 2014. It will remain to be seen whether the higher maximum offering amount and other changes under the JOBS Act will lead to increased use of Regulation A.