Privately-held companies have long encountered a litany of regulatory challenges in raising capital in the United States, both in the private markets and through an initial public offering (an "IPO"). These regulatory challenges arise primarily from the provisions of the Securities Act of 1933 (the "Securities Act"), which generally regulates public and private offerings, and the Securities Exchange Act of 1934 (the "Exchange Act"), which in large part deals with the ongoing reporting and proxy solicitation obligations of public companies and also with the regulation of broker-dealers. On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (the "JOBS Act"), bipartisan legislation aimed at easing regulatory burdens on small companies and facilitating capital formation.
As we discussed in our E-Alert dated April 5, 2012, the JOBS Act makes sweeping changes to the U.S. federal securities laws by (i) streamlining the IPO process and relaxing post-IPO reporting obligations and (ii) easing regulatory restrictions on private capital formation. Our May 2012 E-Alert dealt with that part of the JOBS Act (Title 1) that makes the IPO process less burdensome for certain smaller companies and creates an "on-ramp" of post-IPO regulation for these same companies. This E-Alert deals with certain parts of the JOBS Act (contained in Titles 2 and 4) that create new opportunities, in addition to the highly publicized crowdfunding exemption contained in the JOBS Act, to raise private capital by removing the prohibition on general solicitation and advertising when securities are sold solely to accredited investors pursuant to Rule 506 of Regulation D and by increasing the amount of securities that may be offered and sold in Regulation A type offerings from $5 million to $50 million.
Rule 506 of Regulation D
Rule 506 of Regulation D is an exemption from the registration requirements of the Securities Act which can be utilized by both public and private companies. In a Rule 506 offering, an unlimited amount of securities can be offered and sold to an unlimited number of accredited investors and up to 35 nonaccredited investors. However, Rule 502 of Regulation D currently prohibits the general solicitation or advertisement of securities in Rule 506 offerings. This prohibition on general solicitation and advertising means that issuers need to have some pre-existing relationship with offerees in a Rule 506 offering, resulting in significant limitations on the ability of issuers to raise private capital in a Rule 506 offering. Among other things, Title 2 of the JOBS Act removes this prohibition to permit general solicitation and advertising in Rule 506 offerings sold to accredited investors only.
For more information on the JOBS Act revisions affecting offerings pursuant to Rule 506 of Regulation D, click here.
Pursuant to authority granted in Section 3(b) of the Securities Act to exempt certain securities from the registration requirements of the Securities Act, the SEC adopted Regulation A to provide a mechanism for issuers to publicly raise a limited amount of capital (currently up to $5 million) without having to go through the full blown registration process and with the ability to remain a private company without public company reporting obligations. Regulation A offerings are similar to public offerings in that a document, an offering circular, is prepared, filed with the SEC and subject to SEC review and comment, however, the offering circular provides scaled down disclosure from what would be required in a registration statement. Due in part to the limited offering amount and the relative advantages of utilizing Rule 506 of Regulation D for exempt offerings, Regulation A has been used only infrequently. Title 4 of the JOBS Act increases the utility of Regulation A type offerings by adding a new exemption which is being informally referred to as Regulation A+.
For more information on the new Regulation A+, click here.
For More Information
To learn more about the JOBS Act and how the provisions of the act may benefit your company in raising capital, please contact your relationship attorney at Polsinelli Shughart or a member of the firm’s Corporate Finance and Securities Practice Group.