Gimme an "A!" The SEC Proposes Regulation A Offerings for up to $50 Million

by Baker Donelson
Contact

As we have noted in prior Bulletins, pursuant to Section 5 of the Securities Act of 1933 (Securities Act) and state securities laws, any offer and sale of a security must be registered with the Securities and Exchange Commission (SEC) and any applicable state securities regulators, or exempt from such registration. Currently, SEC rules under Regulation A of the Securities Act provide an exemption from registration for offerings by certain issuers of up to $5 million, including $1.5 million on behalf of selling securityholders, in any 12-month period. This exemption requires the preparation of an offering statement on Form 1-A that must be filed with and qualified by the SEC (or automatically 20 days after the delaying amendment is removed) and is subject to staff review and comment. The offering circular included in the offering statement, which is similar to a prospectus included in a registered offering, must be distributed to potential investors in the Regulation A offering. Securities sold in Regulation A offerings are not restricted securities and may be freely resold.

Pursuant to the Jumpstart our Business Startups (JOBS) Act passed in 2012, the SEC has proposed amendments to Regulation A that retain the option for offerings of up to $5 million in a new Tier 1 of Regulation A and provide a new exemption from Securities Act registration for offerings of up to $50 million, including $15 million by selling securityholders, in any 12-month period in a new Tier 2. The provisions governing Tier 1 offerings would remain largely the same as under current Regulation A, with a few modifications discussed further below. The most important distinctions between Tier 1 and Tier 2 are that (i) Tier 2 offerings would not be subject to registration or qualification under state securities laws and (ii) issuers that conduct a Tier 2 offering would become subject to ongoing SEC reporting requirements. As under current Regulation A, both Tier 1 and Tier 2 offerings would be unregistered public offerings without any restriction on the nature of offerees or investors and would permit general solicitation and advertising subject to the requirements of the amended rules. In addition, securities sold under both Tier 1 and Tier 2 would continue to count towards the stockholders of record threshold for registration and reporting under the Securities Exchange Act of 1934 (Exchange Act).

The amendments would preempt state securities laws for all purchasers in a Tier 2 offering and all offerees in a Regulation A offering. Therefore, compliance with the registration provisions of state securities laws would only be required with respect to purchasers in a Tier 1 offering, to the extent an exemption from registration is not available in the applicable state(s). We discuss below certain other provisions of the proposed amendments.

General; Issuer Eligibility; Investment Limits

Under the proposed rules, Tier 1 and Tier 2 offerings would remain limited to U.S. and Canadian companies not subject to the reporting requirements of the Exchange Act. Companies currently prohibited from using Regulation A, including companies registered or required to be registered under the Investment Company Act of 1940, companies with no business plan or whose only business plan is to merge with or acquire unidentified companies (blank check companies) and issuers of fractional undivided interests in oil or gas rights or similar interests in other mineral rights, would remain so. Companies with, or that have certain insiders and offering participants with, certain criminal convictions or that are subject to certain bars or orders would be disqualified from conducting a Regulation A offering under revised “bad actor” provisions of Rule 262, which the SEC proposes to amend, consistent with the JOBS Act, to track the bad actor disqualifications applicable to private placements conducted under Regulation D (including, in lieu of disqualification, disclosure of bars or orders imposed prior to the effective date of the new rules that are not disqualifying events under current Rule 262).

In addition, issuers that (i) have not filed all required ongoing reports triggered by a prior Tier 2 offering during the two years preceding the filing of the offering statement or (ii) are or have been subject to an SEC order denying, suspending or revoking the registration of a class of securities for failure to comply with the provisions of the Exchange Act or the rules and regulations thereunder within five years before filing the offering statement, would be ineligible to conduct a Regulation A offering. Further, consistent with the JOBS Act, Regulation A offerings would be limited to equity securities, debt securities and debt securities convertible into equity securities; the SEC also proposes to exclude asset-backed securities from Regulation A offerings.

Finally, under the proposed rules investors in a Tier 2 offering would be limited to investing no more than 10% of the greater of their annual income or net worth.

Offering Statement

The proposed amendments would require that Regulation A offering statements be filed electronically through the SEC’s EDGAR filing system instead of in paper as under current Regulation A, although similar to the process for emerging growth companies filing a Form S-1 registration statement, the amended rules would provide an option for non-public review of draft offering statements.

Under the proposed rules, the general structure of the Form 1-A offering statement would remain the same, with Part I focusing on basic information about the issuer and the offering and whether it qualifies to use Regulation A, Part II consisting of the offering circular that is provided to potential investors, and Part III, exhibits. The information in Part I would be considerably expanded, however, to provide the SEC with additional information that can be used to analyze the Regulation A market, among other things. In Part II, the “Model A” question and answer option for the offering circular disclosure would be eliminated. The “Model B” option intended to be a scaled version of the Form S-1 disclosure requirements would be updated, and the alternate option to provide disclosure required by Part I of Form S-1 would remain. The financial statements required for Tier 1 offering would remain largely the same, except balance sheets for the last two fiscal years, instead of the most recent year only, would be required. Consistent with current Form 1-A issuers conducting a Tier 1 offering would be required to provide audited financial statements only if they had been previously prepared by an independent auditor in accordance with U.S. Generally Accepted Auditing Standards or Public Company Accounting Oversight Board (PCAOB) auditing standards. Issuers conducting a Tier 2 offering, however, would be required to provide financial statements prepared generally in accordance with Article 8 of Regulation S-X applicable to smaller reporting companies audited by an independent (though not PCAOB-registered) auditor in accordance with Article 2 of Regulation S-X and PCAOB standards.

The SEC is also proposing an “access equals delivery” model for final offering circulars consistent with Rule 172 under the Securities Act for registered offerings, whereby issuers (and participating broker-dealers) could satisfy their delivery obligations for the final offering circular that is filed and available on EDGAR. This assumes, of course, that a preliminary offering circular had been delivered and would require disclosure in the preliminary offering circular (which must be provided at least 48 hours before sale) that the obligation to deliver a final offering circular may be satisfied electronically. Issuers (and participating broker-dealers) would still be required to deliver a final offering circular or a notice stating that the sale occurred pursuant to a qualified offering statement within two business days after the completion of the sale.
Finally, the proposed amendments would modernize the rules for permissible continuous or delayed offerings (but not at the market offerings) under Regulation A, most notably by allowing some changes to the offering circular, and pricing information, to be included via a supplement to the offering circular instead of an amendment that must be qualified by the SEC.

Solicitation

Currently, Regulation A permits issuers to communicate with potential investors, with no limits on the types of investors (i.e. they need not be qualified institutional buyers or accredited investors), to gauge investor interest prior to filing the offering statement, commonly known as “testing the waters.” Under the proposal, issuers would be able to continue using test the waters communications with all potential investors before, as well as after, filing of the offering statement. Solicitations after filing, however would have to be accompanied by the current preliminary offering circular or inform potential investors where it can be obtained, and such solicitations would have to be updated if they become materially inaccurate or inadequate. Such communications would also have to be filed with the SEC and include certain proscribed legends or disclaimers.

Ongoing Reporting

Currently, issuers that conduct a Regulation A offering must file a Form 2-A with the SEC every six months to report sales under the offering, with a final filing due within 30 days after the end of the offering. Under the proposed amendments to Regulation A, Form 2-A would be rescinded. Instead, issuers conducting a Tier 1 offering would provide the information currently required in Form 2-A only once, on a new Form 1-Z exit report, not later than 30 days after termination or completion of the offering. Issuers conducting a Tier 2 offering would be subject to ongoing reporting requirements including: (i) filing summary information about a recently completed offering and annual reports on new Form 1-K (including a business discussion, management’s discussion and analysis (MD&A) of liquidity, capital resources and results of operations, executive compensation, audited financial statements, and other information); (ii) semiannual reports on Form 1-SA (consisting primarily of financial statements and an MD&A); (iii) current event reports on new Form 1-U to report certain enumerated events; and (iv) in certain circumstances, special financial reports on Forms 1-K and 1-SA. Issuers would be able to suspend such reporting (other than in the fiscal year their Form 1-A offering statement is qualified) using Form 1-Z if the securities of each class to which the offering statement relates is held of record by less than 300 persons, offers and sales under the offering statement are not ongoing, and they have complied with their ongoing reporting obligations. In addition, Regulation A reporting obligations would be automatically suspended if the issuer becomes subject to the Exchange Act’s periodic reporting obligations.

All such filings would be made through the SEC’s EDGAR system. Information about results of the offering would be included on Form 1-Z if the issuer had not previously included that information on a Form 1-K.

The SEC has asked for comments on all aspects of its proposal, so specifics of the amendments to Regulation A as adopted are likely to differ in some respects from the proposal. We expect, however, that the final Regulation A amendments will be substantially the same as those proposed.

The proposing release for the Regulation A amendments is available here [PDF].

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Baker Donelson | Attorney Advertising

Written by:

Baker Donelson
Contact
more
less

Baker Donelson on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!