On March 25, 2015, the Securities and Exchange Commission (SEC) voted to adopt groundbreaking rules implementing Section 3(b)(2) of the Securities Act of 1933 (the Securities Act), as mandated by Title IV of the JOBS Act (commonly referred to as Regulation A+), which added a class of securities exempt from Securities Act registration requirements for offerings of securities of up to $50 million in any 12-month period. Previously, Regulation A offerings were limited to offerings of up to $5 million in a 12-month period. The new rules will take effect on June 19, 2015. We highlight below important aspects of these rules.
Regulation A offerings are often referred to as “mini-public offerings.” Unlike the typical private placement exemption, such as Rule 506(b) under Regulation D, securities are offered publicly under Regulation A. There is no prohibition on the use of general solicitation or advertising in Regulation A offerings. But, like a registered offering, to conduct such an unrestricted offering, an issuer must first file via EDGAR a disclosure document, referred to as an “offering statement” and prepared in accordance with SEC Form 1-A, and qualify it with the appropriate federal and, if applicable, state authorities. Part II of the offering statement is referred to as the “offering circular,” which is the document that issuers are required to deliver to prospective purchasers (analogous to a prospectus in a registered offering).
Companies may now elect to submit a draft offering statement for confidential, nonpublic SEC review and comment prior to public filing via EDGAR (similar to confidential review process for emerging growth companies).
The final rules adopted by the SEC limit the exemption to non-reporting companies organized in the U.S. or Canada, excluding the following (among others):
In response to the mandate in Title IV of the JOBS Act requiring the SEC to update and expand the Regulation A exemption, the SEC’s final rules implement a two-tier system for permissible offerings. The table below sets out the similarities and differences between the two tiers with important supplemental information in the corresponding footnotes:
Offerings of up to $20 million in a 12-month period, including up to $6 million for the account of selling security holders who are affiliates of the issuer.1
Offerings of up to $50 million in a 12-month period, including up to $15 million for the account of selling security holders who are affiliates of the issuer.1
Individual investor limits
None imposed by the SEC.
Non-accredited investors limited to no more than 10% of the greater of the annual income and net worth for individuals or 10% of revenue or net assets for entities.2
Blue sky preemption
Neither offers nor sales are exempt from state securities regulations.3
Both offers and sales are exempt from state-level review.
Updated offering statement on Form 1-A. As revised, the offering circular must include risk factors, a business section, a Management Discussion & Analysis section (based on two most recently completed fiscal years and interim periods), executive compensation disclosure, plan of distribution disclosure and financial statements, among other items.
Same as Tier 1.
Required to file balance sheets and related financial statements for the two previous fiscal year ends (or for such shorter time that the issuer has been in existence), but unaudited financials are acceptable.4
Same scope as required under Tier 1, but financial statements must be audited.
Testing the waters
Use of “testing the waters” solicitation materials are allowed both before and after filing of the offering statement.5 Solicitation materials used after offering statement is filed publicly must be preceded or accompanied by a preliminary offering circular or contain a notice with information on how to access the most current preliminary offering circular.
Same as Tier 1 (except no blue sky considerations).
Issuers are required to file an exit report with the SEC not later than 30 days after termination or completion of an offering.
Issuers must file annual and semiannual ongoing reports and current event updates that are similar, but scaled in comparison, to the requirements for public company reporting.6
Also required to file electronically a special financial report to cover financial periods between the most recent period included in a qualified offering statement and the issuer’s first required periodic report.
Application of Exchange Act Section 12(g) reporting thresholders
Subject to Section 12(g) of the Exchange Act.7
Conditionally exempted from the provisions of Section 12(g) as long as the issuer:
Streamlined transition to reporting company status
Issuer may register a class of Regulation A securities under the Exchange Act by preparing its offering circular using Part I of Form S-1 disclosure model rather than Part II of Form 1-A and filing a Form 8-A short-form registration statement in conjunction with the qualification of its Form 1-A.9
2 These limitations are not applicable to Tier 2 securities listed on a national securities exchange. This rule incorporates the definition of accredited investor from the private placement rules of Regulation D. Non-accredited investors may self-certify that the limits are met and the rules do not impose a requirement on the issuer to verify status as an accredited investor.
3 State securities statutes and regulations (known as “blue sky laws”) related to
Regulation A offerings are varied and complex. The difficulty of complying with these provisions is further compounded by the differing levels of scrutiny applied by state agencies for completeness and accuracy of the filings and, in some jurisdictions, the merits of the offering. The North American Securities Administrators Association (NASAA) recently adopted a coordinated review system for Regulation A offerings across the states providing issuers a “streamlined” uniform filing procedure and review led by two state securities regulatory agencies, including a lead disclosure examiner and, where applicable, a lead merit examiner. Whether participating in the coordinated review system or not, companies should be prepared for the extra cost and time involved in a Tier 1 offering due to the lack of blue sky preemption.
4 This benefit may be illusory depending in which states the issuer intends to conduct the offering. Certain states, by statute or rule, require issuers conducting a Regulation A offering to provide audited financial statements unless the issuer qualifies for specific exemptions.
5 While originally designed to be one of the most inviting features of conducting a Regulation A offering, currently, only a minority of states permit issuers to “test the waters.” Other states require an issuer to file and have qualified a detailed disclosure document before soliciting investors in the state. So, for many issuers, the benefit of being able to “test the waters” on the federal level is outweighed by the delay and cost of state review. Given that all offers made under Tier 1 are not exempt from blue sky regulation, testing the waters may not be feasible in such states under Tier 1.
6 Tier 2 issuers’ reporting obligations would suspend when they are subject to the ongoing reporting requirements of Section 13 of the Exchange Act. They may also be suspended under Regulation A at any time by filing a Form 1-Z exit report after completing reporting for the fiscal year in which an offering statement was qualified, so long as the securities of each class to which such offering statement relates are held of record by fewer than 300 persons (or fewer than 1,200 persons for banks or bank holding companies) and offers or sales made in reliance on a qualified Tier 2 Regulation A offering statement are not ongoing.
7 Section 12(g) of the Exchange Act requires issuers of securities to register with the SEC and thereby become public reporting companies within 120 days of the end of any fiscal year in which they first have total assets exceeding $10 million and any class of equity securities held of record by 2,000 persons, or 500 persons who are not accredited investors, for most issuers. It will be necessary for Tier 1 issuers to monitor closely the number of equity holders they have prior to, and may have as a result of, the offering to avoid forced registration under the Exchange Act.
8 A company qualifies as a smaller reporting company if it has a public float of less than $75 million as of the last business day of its most recently completed semi-annual period or, in the absence of a public float, annual revenues of less than $50 million, as of its most recently completed fiscal year.
9 An issuer registering a class of securities under the Exchange Act concurrently with a Regulation A offering will become an Exchange Act reporting company as soon as its Form 8-A becomes effective. All ongoing reporting obligations under Regulation A will be suspended as long as the issuer remains subject to the reporting requirements of Section 13 of the Exchange Act.