On March 25, the SEC unanimously voted to adopt amendments to Regulation A under the Securities Act of 1933, as amended (the Securities Act), and the related forms and filing and delivery requirements, to implement Title IV of the Jumpstart Our Business Startups Act (the JOBS Act). Existing Regulation A is a simplified public offering exemption from registration under the Securities Act available to eligible issuers to raise up to $5 million using abbreviated offering materials. Section 401 of the JOBS Act directed the SEC to adopt new rules to add a class of securities exempt from the registration requirements of the Securities Act for offerings up to $50 million. The final rules adopted by the SEC, new “Regulation A+” as it is widely called, expand Regulation A to provide for two tiers of offerings: Tier 1 offerings of up to $20 million during any 12-month period, and Tier 2 offerings of up to $50 million in any 12-month period. Certain issuers, including existing reporting companies, investment companies, issuers that are subject to deregistration under the Securities Exchange Act of 1934, as amended (the Exchange Act), and issuers that fail to timely file the ongoing required reports with the SEC, will not be eligible to use Regulation A+ to raise capital.
Existing Regulation A was enacted in 1936 as an exemption to the Securities Act, but has not been an effective tool for capital raising in recent years because of the low $5 million offering cap, and because issuers must comply with securities laws in each state in which the securities are offered, which is time-consuming and expensive. According to the SEC, between 2009 and 2012, only 19 qualified Regulation A offerings were completed, raising approximately $73 million in proceeds. During the same period, the SEC stated that approximately 27,500 offerings of up to $5 million were completed using an exemption under Regulation D, for a total offering amount of approximately $25 billion. Against this backdrop, new Regulation A+ seeks to transform the existing exemption into a viable means for small issuers to raise capital, while retaining strong investor protections.
Significantly, securities offered in a Tier 2 offering under Regulation A will be exempt from the registration and qualification requirements of state securities laws. State securities administrators had lobbied the SEC for states to retain the right to review and regulate Regulation A offerings, and had implemented a new coordinated review program to facilitate the filing and qualification of Regulation A offerings across multiple states. Ultimately, however, the SEC determined that the state qualification process, even under a coordinated review program, could deter issuers from using Regulation A, and opted to preempt state securities registration laws for securities offered in Tier 2 Regulation A offerings. Tier 1 Regulation A offerings remain subject to state securities registration regulations, but issuers may rely on the new coordinated review program to clear Tier 1 offerings in multiple states. All Regulation A offerings also remain subject to state securities anti-fraud laws and regulations.
Regulation A offerings are a simplified public offering in which the issuer provides more limited disclosures to investors compared to a typical Form S-1 registration statement in an initial public offering. Disclosure is prepared by the issuer and filed with and reviewed by the SEC via EDGAR. Filings may be made on a confidential basis for review by the SEC staff, and issuers are eligible to use the “test the waters” provisions to gauge investor interest prior to making a public filing of the offering statement. The offering statement in a Regulation A offering includes an offering circular, which is an abbreviated version of the prospectus used in a registered public offering. Issuers are required to include balance sheets and related financial statements for the prior two fiscal years in both Tier 1 and Tier 2 offering circulars. Financial statements included in an offering circular for a Tier 2 offering must be audited. Sales by selling security holders in a Regulation A+ offering are limited to 30 percent of the aggregate offering amount raised in any 12-month period to promote capital raising by issuers. In addition, Tier 2 issuers also are subject to limited ongoing reporting requirements, and must file annual and semiannual reports and current event reports with the SEC.
Securities offered in a Tier 2 offering are conditionally exempted from the Exchange Act registration requirements that generally are applicable to equity securities of issuers with total assets of more than $10 million and a class of equity securities held of record by 2,000 persons (or 500 persons who are not accredited investors). The securities offered in a Tier 2 Regulation A offering are exempt as long as the issuer engages a registered transfer agent, remains subject to and is current in its Tier 2 ongoing reporting obligations, and had 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 public float, had revenues of less than $50 million in its most recently completed fiscal year). As additional investor protection against loss, sales of securities (other than securities that will be listed on a national securities exchange) in a Tier 2 Regulation A offering are limited to any investor who is not an accredited investor to (i) 10 percent of the greater of annual income or net worth (for natural persons); or (ii) 10 percent of the greater of annual revenue or net assets at fiscal yearend (for non-natural persons).
In an effort to keep the Regulation A+ exemption current, the SEC will review the Tier 1 and Tier 2 offering limits every two years. In addition, the SEC staff also will study and submit to the SEC a report on the impact of both Tier 1 and Tier 2 offerings on capital formation and investor protection within five years of the adoption of Regulation A+. The final Regulation A+ rules and amended forms will be effective 60 days after publication in the Federal Register.
Regulation A+ has been widely anticipated by issuers, investors, crowdfunding portals and others involved in the process of capital-raising by non-public issuers, but it remains to be seen whether Regulation A+ will become an effective means for small issuers to raise capital. Even with the higher offering limits and state securities law preemption in Tier 2 offerings, commentators continue to question whether the more onerous disclosure requirements and offering process compared to private placements under Regulation D, and the cost of preparing and filing the ongoing reports with the SEC, will outweigh the benefits of the higher offering limits under new Regulation A+.