On December 18, 2013, the SEC proposed rules to amend Regulation A under the U.S. Securities Act of 1933 (the "1933 Act") to modernize and expand the framework for capital raising by smaller companies, as mandated under Title IV of the Jumpstart Our Business Startups Act (the "JOBS Act"). Currently, Regulation A enables eligible U.S. and Canadian issuers that are not SEC reporting companies to raise up to $5 million in any 12-month period in one or more offerings exempt from registration under the 1933 Act.1 Regulation A has been used infrequently in recent years principally due to the low offering threshold and the absence of state securities or "blue sky" law exemptions for Regulation A offerings.2 Title IV of The JOBS Act, entitled "Small Company Capital Formation," directed the SEC to add a new exemption from registration under the 1933 Act for offerings of securities up to $50 million in any 12-month period. The proposed rules, known as Regulation A+, would expand Regulation A into two tiers:
- Tier 1, an exemption from registration for securities offerings of up to $5 million in any 12-month period, including up to $1.5 million for the account of selling securityholders (to preserve the existing exemption in Regulation A in substantially its current form), and
- Tier 2, an exemption from registration for securities offerings of up to $50 million in any 12-month period, including up to $15 million for the account of selling securityholders (to create the new exemption mandated under the JOBS Act).
The proposed rules seek to modernize the Regulation A offering framework by including a number of proposals that resemble regulatory developments in the registered offering process under Section 5 of 1933 Act. Rules regarding issuer eligibility (including "bad actor" disqualification provisions), communications, qualification and offering process (including "testing the waters" provisions), offering statement disclosure and certain other matters would apply equally to both Tier 1 and Tier 2 offerings. Tier 2 offerings would be subject to additional requirements, such as investor purchase limits, the provision of audited financial statements in the offering statement and the issuer becoming subject to ongoing reporting requirements. In light of the additional requirements proposed for Tier 2 offerings, securities offered and sold in a Tier 2 offering would be exempt from registration and qualification under state securities laws.3
1 A Regulation A offering is a public offering, with no
prohibition on general solicitation and general advertising.
Securities sold under Regulation A are not "restricted
securities" under the 1933 Act and, therefore, are not subject
to the limitations on resale that apply to securities sold in
private offerings. There is currently no limit on the amount of
securities that may be purchased by an investor in a Regulation A
offering. However, one of the most significant concerns limiting
the use of the current Regulation A exemption has been the
requirement to comply with state securities or "blue sky"
2 The SEC stated in the proposing release that "[i]n 2012 alone, there were eight qualified Regulation A offerings for a total offering amount of approximately $34.5 million, compared to approximately 7,700 Regulation D offerings of up to $5 million for a total offering amount of approximately $7 billion, and 52 registered offerings of up to $5 million for a total offering amount of approximately $132 million." According to the SEC, no Canadian issuers have qualified a Regulation A offering since 2002. Rule 506 under Regulation D has become the most commonly used exemption from registration as it has no offering limit and securities issued under Rule 506 are pre-empted from registration or qualification under state securities or "blue sky" laws. (The most a state may require of an issuer in a Rule 506 offering is a notice filing and the payment of a filing fee. In Rule 506 offerings, states continue to retain jurisdiction over anti-fraud enforcement and the regulation of intermediaries such as broker-dealers.)
3 Issuers proposing to offer or sell securities in Tier 1 offerings would continue to be subject to state securities law registration and qualification requirements, unless an exemption is available under state law. The North American Securities Administrators Association has proposed a coordinated review program that would streamline the state filing and review process for Regulation A offerings, but the details have not been finalized. The SEC indicated in the proposed rules that it would monitor the development of the coordinated review program. It remains to be seen whether a coordinated state review program can be finalized, adopted and successfully implemented and, if so, whether such a program would sufficiently address current concerns about the costs of blue sky compliance.
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