United States: Regulation A: Easier Access To The U.S. Capital Markets Is Coming

Last Updated: February 14 2014
Article by Guy P. Lander

In December 2013, the U.S. Securities and Exchange Commission ("SEC") proposed new rules that would permit U.S. and Canadian companies that are not SEC reporting issuers ("Reg A Issuers") to sell up to $50 million of their securities in any rolling 12 month period with reduced regulation and related expense, and immediate subsequent public trading of the purchased securities. This proposed Regulation A offers access to capital and the U.S. capital markets with reduced initial and ongoing expenses, reduced legal liability, potentially higher valuations, increased capital raising possibilities and improved currency for acquisitions and employee compensation, and with limited subsequent SEC reporting and without ongoing SOX compliance. In contrast to a private placement, Regulation A offers "free trading" securities and could be used as either a transitional stage on the road to becoming a full-fledged public company or simply as a means to accessing the U.S. capital markets with reduced fees and concomitant expense.

The proposed Regulation A consists of:

Tier I Offerings: Up to $5 million in a rolling 12 month period, $1.5 million of which may be sold by stockholders.
Tier II Offerings: Up to $50 million in a rolling 12 month period, $15 million of which may be sold by stockholders.1

For offerings up to $5 million, issuers may use Regulation A Tier 1 or Tier II, Regulation D or another Securities Act exemption under the U.S. Securities Act of 1933 (the "Securities Act").

Regulation A offers significantly reduced ongoing reporting and compliance obligations compared to a registered offering. The following reporting and compliance obligations would NOT apply to Regulation A companies (and their directors, officers and stockholders):

  • the SEC's proxy statement rules;
  • the SEC's tender offer rules and going private rules;
  • Section 16 shareholder reporting by directors, executive officers and 10% stockholders, related short swing profit recapture and prohibition on "short" transactions;
  • Section 13 D/G market alert disclosure by 5% stockholders;
  • audit committee independence requirements of SOX;
  • SOX Sec. 404 internal controls;
  • director and officer loan prohibitions under SOX;
  • CEO/CFO SOX certifications;
  • conflict minerals and resource extraction disclosures under the Dodd-Frank Act; and
  • pay ratio disclosure under the Dodd-Frank Act.

Eligible Issuers

The Regulation A exemption would be available to any company that is both organized in and has its principal place of business in the United States or Canada, but is NOT:

  • subject to reporting under the Securities Exchange Act of 1934 (the "Exchange Act");
  • an investment company;
  • a development stage company with no specific business plan or purpose or whose business plan is to engage in a merger or acquisition with an unidentified company (e.g., SPACs, BDCs, blank check and shell companies);
  • disqualified under the "bad actor" provisions of the proposed rules (similar to Reg. D Rule 506(d)); or
  • an issuer of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights.

Additionally, issuers conducting Regulation A offerings under the proposed rules must also:

  • have filed the ongoing reports required by the proposed rules (described below) during the preceding two years of filing a new Regulation A offering statement; and
  • not be subject to an SEC order revoking its registration under the Exchange Act under Section 12(j) of that Act during the preceding five years.

Eligible Securities

Offerings under proposed Regulation A must consist only of equity securities, debt securities and debt securities convertible into or exchangeable for equity securities, including any guarantees of those securities. Asset-backed securities will not be eligible to be offered under the proposed rules.

Eligible Transactions

Transactions permitted under Regulation A would include:

  • primary capital raising offerings;
  • offerings by stockholders;
  • offerings under a dividend or interest reinvestment plan or an employee benefit plan;
  • securities issuances upon the exercise of outstanding options, warrants or rights or conversion of outstanding securities;
  • pledging of securities as collateral; and
  • continuous offerings in an amount expected to be sold within two years, as long as the offering begins within two days after the offering statement has been qualified.

The proposed rules would not be available for at-the-market offerings or business combination transactions.

Investment Limitation on Purchasers

The proposed rules would limit the amount of securities that a potential investor may invest in a Tier 2 offering to 10% of the greater of the investor's annual income or net worth, calculated in accordance with Regulation D guidelines. There is no similar limit for a Tier 1 offering. Tier 2 issuers would be able to rely on an investor's representation of compliance with these limitations unless the issuer knew at the time of sale that the representation was false. However, there is no limit on how much an investor may purchase in the open market after the offering.

Integration of Safe Harbors

Regulation A offerings will not be integrated with:

  • prior offers or sales of securities (outside Regulation A); or
  • subsequent offers and sales of securities that are:

    • registered under the Securities Act, except as provided in Rule 254(d);
    • made under Rule 701;
    • made under an employee benefit plan;
    • made under Regulation S;
    • made more than six months after completion of the Regulation A offering; or
    • crowdfunding offers (once rules are adopted).

Offering Process

To offer securities under Regulation A, a company must file an "offering statement" with the SEC via EDGAR for both Tier 1 and Tier 2 offerings, and the SEC must affirmatively "qualify" the Offering Statement. For a company that has not previously sold securities under either Regulation A or an effective registration statement under the Securities Act, confidential, non-public review of draft offering statements would be permitted before filing. However, the non-public documents would have to be publicly filed no later than 21 days before qualification. This enables Regulation A issuers to maintain confidentiality through road shows. In contrast, emerging growth companies must come out of confidential treatment before road shows.

A company pursuing a Regulation A offering would be able to "test the waters", i.e., seek indications of interest, from any potential investors before filing the offering statement. The company would be required to file any solicitation materials as an exhibit to its offering statement. See "Solicitation Communications" below.

As with a registered offering, if underwriters are participating in the Regulation A offering, the offering statement and underwriting arrangements would be required to be filed with and approved by FINRA, unless an exemption is available.

Although the process for filing, review and qualification of Regulation A offering statements would be similar to that for full blown registration statements, given the reduced disclosures, the Regulation A offering process should be somewhat faster and less costly than

a full blown registration statement. However, that remains to be seen. Offering Statement

The Regulation A offering statement would be filed on Form 1-A and consist of three parts: Part I (Notification), Part II (Offering Circular) and Part III (Exhibits). Part I provides notice of certain basic information about the company and its proposed offering, including disclosure of issuer eligibility, "bad actor" disqualification, unregistered securities sold within the past year, and a summary of key issuer financial information and offering details. Part II, the offering circular, is similar to a prospectus in a registered offering, and Part III is similar to the exhibit requirement in a registration statement.

As proposed, disclosure required in the offering circular would cover substantially similar information to that required on a Form S-1 for the IPO of an emerging growth company, including two years of audited financial statements for Tier 2 offerings, MD&A, risk factors, a three-year description of the business, compensation information for the three most highly paid officers or directors and related-party transaction disclosure. The information required is intended to be similar to that required of smaller companies in a prospectus, but more limited in certain respects.

Pricing can be done by supplement rather than an amendment, which is easier.

Financial Statements

Under the proposed rules, issuers conducting Tier 1 and Tier 2 offerings will be required to comply with the financial statement and auditing requirements as set forth in the table below.

Canadian issuers can use IFRS instead of U.S. GAAP.

Financial Statement and Audit Requirements
Type of Offering Tier 1 Tier 2
Financial Statements Two years financial statements
(or since inception if less than 2 years)
Two years financial statements
Audit Required No, only required to the extent that they were prepared for other purposes Yes, required
Audit Standard U.S. GAAS or PCAOB standards PCAOB standards
Auditor Independence Must meet Rule 2-01 of Regulation S-X

Need not be PCAOB-registered
Must meet Rule 2-01 of Regulation S-X

Need not be PCAOB-registered

Continuous or Delayed Offerings

The proposed rules permit continuous or delayed offerings for, among other types of offerings, secondary offerings, securities offered and sold under dividend reinvestment plans or employee benefit plans, securities issued upon the exercise of options, warrants or rights, and certain other continuous offerings. The proposed rules also require amendments to the offering statement to be filed and requalified annually to include updated financial statements and fundamental changes to the information in the offering statement.

Solicitation Communications – Test the Waters Expanded to Pre-and Post-Filing of Offering Statement

An issuer using Regulation A could "test the waters," i.e., seek indications of interest, from all types of potential investors both before and after filing and offering statement, unlike EGCs, which are limited to qualified institutional buyers and institutional accredited investors. Any solicitation material would need to be filed with the SEC and must also contain certain disclaimers and legends indicating that sales under Regulation A would be contingent on qualification of the offering statement by the SEC, and the delivery of a final offering statement. Any solicitation materials used after filing of the offering statement with the SEC would have to be preceded or accompanied by a preliminary offering circular or contain a notice informing potential investors where and how the most current preliminary offering circular can be obtained (including by providing a URL link to the offering circular or offering statement on EDGAR).

The preliminary offering circular would have to be delivered at least 48 hours in advance of a sale. A final offering circular would have to be delivered within two business days after the sale in cases where the sale was made in reliance on the delivery of a preliminary offering circular. Issuers and intermediaries would be able to satisfy the delivery requirements for the final offering circular under an "access equals delivery" approach when the final offering circular is filed and available on EDGAR.

The proposed rules would amend Rule 254(d) to provide that where an issuer decides to register an offering after soliciting interest in a contemplated, but abandoned, Regulation A offering, any Tier 1 or Tier 2 offers made pursuant to Regulation A would not be subject to integration with the subsequent registered offering, unless the issuer engaged in solicitations of interest in reliance on Regulation A to persons other than qualified institutional buyers (QIBs) and institutional accredited investors. An issuer soliciting interest in either a Tier 1 or Tier 2 offering to persons other than QIBs and institutional accredited investors must wait at least 30 calendar days between the last solicitation of interest and the filing of the registration statement with the SEC.

Ongoing Reporting and Compliance

Tier 1 issuers would be required to file electronically with the SEC certain information about their offerings within 30 days after completion or termination of the offering on a new form Form 1-Z, which is an exit report. Tier 2 issuers would be required to file annual, semiannual and current reports with the SEC via EDGAR until the company becomes a reporting company or, subject to certain exceptions, until there are fewer than 300 holders of record of the securities of the class sold per Regulation A securities.

For Tier 2 issuers:

  • Annual reports on Form 1-K would be required for the fiscal year in which the offering statement became qualified and for every fiscal year thereafter. The annual report would update the information contained in the company's offering circular, including two years of annual audited financial statements. The annual report would be filed within 120 days of the company's fiscal year end (compared to the Form 10-K filing deadline of 60 to 90 days, depending on the size of the company).
  • Semiannual reports on Form 1-SA covering the first half of each fiscal year of the company would be required beginning with the first fiscal year for which financial statements relating to the first half of that year were not included in the offering circular. The semiannual report would consist primarily of unaudited financial statements and MD&A. The semiannual report would be filed within 90 days of the end of the second quarter (compared to the Form 10-Q deadline of 40 or 45 days, depending on the size of the company) and would be filed only once a year (compared to three times for Form 10-Q).
  • Current reports on Form 1-U would be required upon the occurrence of certain specified events, and would be filed within four business days of the event (similar to the Form 8-K filing requirement). Form 1-U reportable events are a reduced number of Form 8-K events, including bankruptcy; material modification to the rights of securityholders; changes in accountant; non-reliance on previous financial statements; changes in control; departure of the principal executive officer, principal financial officer or principal accounting officer; and unregistered sales of 5% or more of outstanding equity securities. Additionally, any "fundamental change" to the nature of the company's business would trigger a Form 1-U filing. The fundamental change required to be reported would be major and substantial changes in the issuer's business or plan of operations or changes reasonably expected to result in such changes, such as significant acquisitions or dispositions, or the entry into, or termination of, a material definitive agreement that has or will result in major and substantial changes to the nature of an issuer's business or plan of operations.
  • Exit Report on Form 1-Z could be filed by a Tier 2 issuer to exit the ongoing reporting regime at if any time after completing reporting for the fiscal year in which the offering statement was qualified if the securities of the relevant class are held of record by less than 300 persons and offers and sales under a qualified offering statement are not ongoing and it is current in its Regulation A filing obligations.

Secondary Markets

Securities sold under Regulation A would have the status of "free trading" securities and would not be "restricted securities" under Rule 144 under the Securities Act (unlike securities sold in Regulation D or Rule 144A private placements). Additionally, the ongoing reports required after a company's Tier 2 offering would satisfy a broker-dealer's obligations under Rule 15c2-11 to maintain records of basic information about the company and its securities. This would permit broker-dealers to publish quotes for the company's stock, which should facilitate secondary market activity in Regulation A securities.

State "Blue-Sky" Laws Pre-Empted

State "blue sky" laws would be preempted for both the offer and sale of securities in Tier 2 offerings, which is a significant benefit. For Tier I offerings, state "blue sky" laws would not be pre-empted. Blue sky laws would also continue to cover fraudulent conduct in both Tier I and Tier II transactions. The proposed rules accomplish this preemption by defining "qualified purchaser" under Section 18(b)(3) of the Securities Act to include all offerees in a Regulation A offering, and all purchasers in a Tier 2 offering.

Securities that are "Widely-Held" Trigger Exchange Act Registration under Section 12(g)

Under the proposed rules, when the securities of a Regulation A issuer become "widely-held", the issuer may become subject to registration and periodic reporting under Section 12(g) of the Exchange Act. The Section 12(g) threshold is: an issuer having total assets exceeding $10 million and a class of securities held of record by either 2,000 persons, or 500 persons who are not accredited investors. For purposes of determining holders of record, beneficial owners who hold their shares through a broker are not counted. Such shares are instead counted at the broker level, so that each broker who is a record holder for one or more beneficial owners holding their shares in "street name" would constitute one shareholder of record (i.e., no "look through" to beneficial owners).

Canadian issuers using Regulation A could rely on the Rule 12g3-2(b) information supplying exemption from Exchange Act registration.

Liability

Under the proposed rules, sellers of securities would not be subject to Section 11 liability of the Securities Act. However, they will be subject to liability to investors under Section 12(a)(2) for any offer or sale by means of an offering circular or an oral communication that includes a false or misleading statement of fact. Additionally, other anti-fraud and civil liability provisions of the securities laws would apply, including Section 17 of the Securities Act, Section 10(b) of the Exchange Act and related Rule 10b-5. As a result, underwriters in a Regulation A offering would probably require due diligence renew comparable to a registered offering.

Conclusion

The proposed Regulation A offers a real opportunity for U.S. and Canadian issuers to access the U.S. capital markets and obtain the benefits of "registered" securities with less regulation and ongoing expense.

Footnote

1. All sales by selling securityholders under either Tier 1 or Tier 2 will be aggregated with all other sales of Regulation A securities by the issuer and other securityholders for purposes of calculating the maximum permissible amount of securities that may be sold during any 12-month period. Additionally, affiliates can use these rules.

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
Similar Articles
Relevancy Powered by MondaqAI
McGuireWoods LLP
Reinhart Boerner Van Deuren s.c.
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
McGuireWoods LLP
Reinhart Boerner Van Deuren s.c.
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