United States: No Easy A: SEC Proposes Rules For Regulation A+

Last Updated: December 23 2013
Article by Brian S. Korn and Bryan Y.M. Tham

In the last of its major rulemaking proposals under the JOBS Act, on December 18, 2013, the U.S. Securities and Exchange Commission (SEC) voted to publish proposed rules to modify and develop Regulation A, the so-called (and little-used) "small offering exemption." The new proposal is required by the Jumpstart Our Business Startups Act of 2012 (JOBS Act) and will be open for a 60-day comment period. The proposed rules would modify and expand Regulation A, which currently exempts from SEC registration offerings of securities of up to $5 million within a 12-month period. The new Regulation A will increase this maximum to $50 million, and allow for the first time for state securities law pre-emption in certain circumstances when offering more than $5 million and following the Tier 2 protocol, as described below.

Congress's goal in requiring expansion of Regulation A, dubbed by many market observers as Regulation A+, was to enable small businesses to raise capital without SEC registration and as a viable, potentially more compelling alternative to accredited investors Regulation D private placements and public crowdfunding.1 Like public crowdfunding, Regulation A securities are not private placements and therefore are not restricted. Also like public crowdfunding, current public companies cannot use Regulation A to raise capital.

The Two Tiers of Regulation A+ (and the Potential Third Tier)

Under the new proposed rules, Regulation A+ would allow for an exemption from registration for two tiers of offering:

  • Tier 1: Up to $5 million in any 12-month period, including no more than $1.5 million sold by selling shareholders. Tier 1 offerings would still require approval from state regulators (i.e., there is no federal securities law pre-emption for these smaller offerings).
  • Tier 2: Up to $50 million in any 12-month period, including no more than $15 million sold by selling shareholders. Tier 2 offerings would be exempt from state securities laws and the burdens of preparing filings and obtaining approvals in numerous states, but are subject to investment limitations, enhanced disclosure and ongoing reporting obligations.
    Additionally, each tier would have modified issuer eligibility requirements, content and filing requirements for offering statements and ongoing reporting requirements for issuers.

Scope of Regulation A+

Certain issuers would be excluded from being able to use Regulation A+, including current public filers (and those who were public filers in the past two years), and certain "bad boys" - issuers that are or have been subject to any SEC order pursuant to Section 12(j) of the Securities Exchange Act of 1934, as amended, entered within five years before the filing of the offering statement. Additionally, asset-backed securities (as defined in Regulation AB) would be excluded as eligible securities and, in a Tier 2 offering, an investor would be limited to investing no more than 10 percent of the greater of annual income or net worth.

Confidential Submissions and 'Testing the Waters' Materials

You would be forgiven if you did a double-take when reading the Regulation A+ release and thought you had stumbled on an IPO frequently asked questions list. As with current Regulation A, an "offering circular" must be prepared and filed with the SEC. The SEC can review and provide comments, similar to the IPO process. As with IPOs for "emerging growth companies," the SEC will allow confidential filings and reviews for Regulation A+ offerings. The offering circular, which must be publicly filed not later than 21 days before qualification (also similar to the IPO public S-1/F-1 filing 21 days before roadshow standard), modifies the structure allowable under Regulation A, and allows for a narrative disclosure format for the offering circular. Offering circulars will look more like prospectuses and less like RFP responses.

Qualification of the offering circular requires action by the SEC through an order. All issuers will need to file balance sheets for the two most recently completed fiscal year ends (or applicable shorter periods of existence) and Tier 2 offerings will require the inclusion of audited financial statement in their offering circulars.

Regulation A+ would also allow (and in some cases require) modern filing conveniences, such as electronic filing and "access equals delivery" delivery requirements.

Also similar to IPOs for "emerging growth companies," under both Tier 1 and Tier 2 offerings, issuers would be permitted to "test the waters" with prospective investors before and/or after the filing of the offering circular. However, any materials used in testing the waters after publicly filing the offering circular should be preceded by or be accompanied by a preliminary offering circular or contain a notice providing instructions regarding how potential investors may obtain the most current preliminary offering circular. Remember that as "exempt securities," Regulation A offerings are exempt from the "no offers until filing" requirements of Section 5 of the Securities Act.

Ongoing Reporting and State Securities Laws Pre-Emption

Issuers conducting a Tier 1 offering will be required to electronically file an exit report (on Form 1-Z) with the SEC no later than 30 calendar days after termination or completion of a qualified Regulation A offering (to provide information about sales in such offerings and to update certain issuer information). No other ongoing reporting is required of Tier 1 issuers. State laws must be observed as they are today.

Issuers conducting a Tier 2 offering must electronically file with the SEC annual, semi-annual and current event updates. Tier 2 issuers also may be required to provide special financial reports to provide information to investors in between the time the financial statements are included in its Form 1-A and the first periodic report after qualification of the offering statement. Tier 2 issuers may exit the Regulation A reporting regime, after completing reporting for the fiscal year in which an offering statement was qualified, by filing an exit form, provided such securities of each class to which the offering statement relates are held of record by fewer than 300 persons (also the public company deregistration standard), and offers or sales made in reliance on a qualified Regulation A offering statement are not ongoing.

State securities law registration and qualification requirements for securities offered or sold to "qualified purchasers" (defined as all offerees of securities in a Regulation A offering and all purchasers in a Tier 2 offering) are pre-empted.

Potential Third Tier

In connection with the proposed rules, an SEC commissioner has stated that, subject to public comments, if any, and further consideration by the SEC, the final rules may include an intermediate third tier, which may cover Regulation A offerings of between $10 million to $15 million, pre-empt state blue sky laws and have less-extensive continuing disclosure obligations than Tier 2 offerings. Maybe this will be called Tier 1½.

Putting it All Together: Regulation A+, Public Crowdfunding and Regulation D Rule 506

The SEC's press release fact sheet for the proposed rules and the proposed rule amendments release identify and recognize the rarity of Regulation A offerings compared to Regulation D exemptions and registered offerings, and that the issues in cost and complexity make Regulation A less practical than other Securities Act exemptions, such as Regulation D, and registered offerings.2

Regulation A

Regulation D
(of up to $5 million)

Public Offerings
(of up to $5 million)

From 2009 through 2012

19 qualified offerings for a total offering amount of approx. $73 million

Approx. 27,000 offerings for a total offering amount of approx.$25 billion

373 offerings for a total offering amount of approx. $840 million

In 2012

8 qualified offerings for a total offering amount of approx. $34.5 million

Approx. 7,700 offerings for a total offering amount of approx. $7 billion

52 offerings for a total offering amount of approx. $132 million

In considering the use of Regulation A+, eligible issuers will likely consider: (A) a Regulation A+ cost-benefit analysis, relating the benefit of an up to $50 million capital raise in a 12-month period (for Tier 2) against the cost for the ongoing filing and compliance requirements of Regulation A+, and (B) a comparative analysis against potential additional exemptions allowable by current securities laws, including public crowdsourcing and Regulation D. We take a closer look at Regulation A+ (Tiers 1 and 2) vs. public crowdfunding vs. Regulation D private placements below (checkboxes indicate our view of most preferable or least restrictive or costly):

Feature

Public Crowdfunding

Regulation A+
(Tier 1)

Regulation A+
(Tier 2)

Regulation D Rule 506 (4(a)(2))

Maximum Total Raised

$1 million per 12 month period

$5 million per 12 month period; including up to $1.5 million for selling shareholders

$50 million per 12 month period; including up to $15 million for selling shareholders

Unlimited

ž

Number of Investors

Unlimited but subject to maximum total raised

Unrestricted

ž

Unrestricted

ž

Unlimited accredited investors; up to 35 non-accredited investors unless soliciting (if soliciting- 0 non-accreds)

ž

Investment Per Investor

Restricted by income/net worth

Unrestricted

ž

Restricted by income/net worth

Unrestricted

ž

Investor Disclosure

Required, must be filed with SEC

Required, must be filed with SEC

Required, must be filed with SEC

Not required if all accredited investors; Form D filing proposed

ž

Intermediary Required

Yes – broker/dealer or funding portal

No

ž

No

ž

No

ž

Subject to ongoing SEC reporting following raise

Yes, at least annually, possibly more frequently

No; as long as exit report is filed not later than 30 calendar days after termination or completion

Yes; audited financials filed annually; annual, semi-annual, current reporting required

May file exit report, so long as issuer meets certain qualifications

No

ž

Disclosure Liability

Yes, full disclosure liability with a knowledge exception

Yes, full disclosure liability with a knowledge exception

Yes, full disclosure liability with a knowledge exception

Only anti-fraud liability

ž

Shares restricted

Yes, for one year

No

ž

No

ž

Yes, for public companies most can sell under Rule 144 after six months

State Filing

Possibly, depends on future rules by state

Not exempt from state securities law registration and qualification

Exempt from state securities law registration and qualification if sold to "qualified purchasers," defined to include all offerees in a Regulation A offering and all purchasers in a Tier 2 offering

Usually no if only offering to accredited investors

ž

Advertising and general solicitation

Not allowed

"Testing the waters" permitted before filing; general solicitation permitted after qualification

ž

"Testing the waters" permitted before filing; general solicitation permitted after qualification

ž

Allowed if sales are made only to accredited investors and issuer takes reasonable steps to verify accredited status

Can public cos., foreign issuers, investment companies and exempt inv. companies issue

No

Yes, but limited

Yes, but limited

Yes

ž

The comment period for the proposed rules will expire 60 days after their publication in the Federal Register.

Pepper Points

  • The new rules create a two-tier system under Regulation A+, each with different modified requirements for eligibility, content and filing of offering statements and ongoing reporting requirements for issuers; the first tier allowing for up to $5 million in any 12-month period and the second tier allowing for up to $50 million in any 12-month period.
  • Subject to public comment, the SEC may consider a potential third (intermediary) tier, with similarly intermediary requirements for eligibility, content and filing of offering statements and ongoing reporting requirements for issuers.
  • Public comments will likely identify whether the balance struck by the SEC in increasing the amount of money allowed to be raised under Regulation A+ and the requirements of state securities laws/federal securities laws; ongoing filing, compliance and reporting requirements; and eligibility allowances is adequate.
  • Time will tell whether the final rules in the implementation of Regulation A+ are successful in enticing small companies to use Regulation A+ as opposed to alternative public crowdfunding or Regulation D exemptions for raising capital.

Footnotes

1. For more information about Regulation D and recently proposed rules, please see: https://www.jdsupra.com/legalnews/sec-relaxes-ban-on-advertising-and-solic-57154/.

For more information about crowdfunding and recently proposed crowdfunding rules, please see: http://www.pepperlaw.com/publications_article.aspx?ArticleKey=2776; and http://www.pepperlaw.com/pdfs/Korn_Crowdfunding112712_Slides.pdf .

2. Information regarding recent IPO trends can be found at: http://www.pepperlaw.com/publications_article.aspx?ArticleKey=2800.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Brian S. Korn
Bryan Y.M. Tham
Similar Articles
Relevancy Powered by MondaqAI
Sheppard Mullin Richter & Hampton
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Sheppard Mullin Richter & Hampton
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions