On March 25, 2015, the SEC adopted final rules amending Regulation A, referred to now as Regulation A+. These amendments were required by Congress via Title IV of the JOBS Act which was passed some time ago. (we are all still waiting for the Regulation Crowdfunding rules to be finalized).
The general rule is that when a company offers or sells a security, the security must either be registered or an exemption from registration must be relied upon. Regulation A has been on the books for a long long time and has been relied on very little.
Now the SEC has a tough job, its tasked with allowing companies to raise money via offerings of securities but on the other hand it needs to ensure that fraud does not run rampant. These two goals don’t have to be mutually exclusive, but the SEC has generally focused on the latter of the two at the expense of the first.
The final rules here do update and expand Regulation A, and now provide for two tiers of offerings under the Regulation A+ regime:
– Tier 1 – which allows offerings of securities of up to $20,000,000 in a 12 month period, and
– Tier 2 – which allows offerings of securities of up to $50,000,000 in a 12 month period. Offerings under Tier 2 will preempt blue sky securities laws (covering registration and qualification). Tier 2 offerings are also exempt from Section 12(g) of the Exchange Act if the company meets certain conditions.
Both tiers are subject to various requirements similar to those imposed by Regulation A now, and there are limits on re-sale by affiliates. Tier 2 offerings have additional disclosure and ongoing reporting requirements, such as:
– requirement that audited financial statements be provided;
– requirement that an annual, semiannual and current event reports; and
– a limitation on the amount of securities non-accredited investors can purchase of no more than 10 percent of the greater than the investors annual income or net worth.
Most companies will be able to rely on Regulation A+ if they choose do to so, but companies such as the following are not eligible:
– the company cannot have no business plan, or a business plan which is only to merge with an operating company (i.e. no shells);
– no companies seeking to offer or sell asset-backed securities (we all learned our lesson with MBS’s in 2008) or fractional undivided interests in oil, gas or mineral rights;
– have been subject to an SEC order within the last five years;
– have not filed ongoing reports required by the rules during the preceding two years; or
– those disqualified under bad actor rules.
So again, the SEC has a tough job. They chose a middle ground for the Regulation A+ which is an an improvement from the current Regulation A regime. Now at least for Tier 2 offerings under Regulation A+, blue sky laws will be preempted, but the cost of getting audited financials and the ongoing costs of filing annual, semiannual and current event reports will eat away at the proceeds. In any event, this should cause more Regulation A+ offerings in the future, which is a good thing. I would expect that most will go with the Tier 2 route, and will be used for the more established company with a track record. Smaller companies, or those looking to raise lower amounts of capital will still likely rely on Regulation D or perhaps the new Regulation Crowdfunding rules.