United States: SEC Adopts Final Regulation A+ Rules Ushering In New Era Of Capital Raising

On March 25, 2015, the Securities and Exchange Commission (the "SEC") adopted final rules that update and expand Regulation A under the Securities Act of 1933, as amended (the "Securities Act"), an existing exemption from registration for smaller issuers of securities. Under the current Regulation A, non-reporting companies can sell up to $5 million of securities in a public offering without being subject to the SEC's public company reporting regime. The final rules, often referred to as "Regulation A+," will permit companies to offer and sell up to $50 million of securities in a 12-month period.

Offering Tiers

Regulation A+ provides for two tiers of offerings:

  • Tier 1 – up to $20 million in a rolling 12-month period (including no more than $6 million on behalf of selling securityholders that are affiliates of the issuer).
  • Tier 2 – up to $50 million in a rolling 12-month period (including no more than $15 million on behalf of selling securityholders that are affiliates of the issuer).

In addition, sales by selling securityholders in an issuer's initial Regulation A offering and any subsequently qualified Regulation A offering within the 12-month period following the date of qualification of the initial Regulation A offering is limited to 30 percent of the aggregate offering price.

Eligible Issuers

Regulation A+ is limited to issuers organized and having their principal place of business in the United States or Canada. The following issuers will be "ineligible" for the exemption provided under Regulation A+:

  • an issuer that is an SEC-reporting company;
  • a blank check company;
  • any investment company registered or required to be registered under the Investment Company Act of 1940 (this includes business development companies); and
  • any entity issuing fractional undivided interests in oil or gas rights, or similar interests in other mineral rights.

The exemption also is not available to issuers:

  • that have not filed with the SEC the ongoing reports required by Regulation A+ during the two years immediately preceding the filing of a new offering statement;
  • that have had their registration revoked pursuant to an order under Section 12(j) of the Securities Exchange Act of 1934 (the "Exchange Act") that was entered into within five years before the filing of the offering statement; and
  • subject to the bad actor disqualification.

Eligible Securities

All offerings under Regulation A+ are limited to equity securities, (including warrants), debt securities and debt securities convertible into or exchangeable into equity interests, including any guarantees of such securities. The final rules specifically exclude asset-backed securities.

Continuous Offerings

The final rules continue to permit continuous or delayed offerings in certain circumstances, providing greater flexibility to issuers with respect to the timing of their offerings. However, the final rules condition the ability to sell securities in a continuous or delayed Tier 2 offering on being current with ongoing reporting requirements at the time of sale.

Investment Limitation

The final rules impose an investment limit for Tier 2 offerings of no more than (i) 10% of the greater of the investor's annual income and net worth (for natural persons) and (ii) 10% of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons). The investment limitation will not apply to accredited investors or to securities that are to be listed on a national securities exchange at the consummation of the offering. Investors must be notified of the investment limitation. Issuers may rely on an investor's representation of compliance with such investment limitation, unless the issuer knew at the time of sale that such representation was untrue.

Solicitation

Under Regulation A+, issuers are permitted to "test the waters" or solicit interest in a potential offering from the general public either before or after the filing of the offering statement, provided any solicitation materials used after publicly filing the offering statement are 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. Solicitation materials must be filed as exhibits to the offering statement, including in connection with a submission for non-public review.

Integration of Offerings

Regulation A+ includes a safe harbor that provides that a Regulation A+ offering will not be integrated with:

  • prior offers or sales of securities; or
  • subsequent offers or sales of securities that are:
    • registered under the Securities Act, except as provided in Rule 255(e) [abandoned offerings];
    • made in reliance on Rule 701;
    • made pursuant to an employee benefit plan;
    • made in reliance on Regulation S [offerings outside of the U.S.];
    • made pursuant to Section 4(a)(6) of the Securities Act [crowdfunded offerings]; or
    • made more than six months after the completion of the Regulation A offering.

Filing Requirements

The final rules amend the filing process and add the option to submit an offering statement for non-public review by the SEC. For those issuers that choose the non-public review, the offering statement must be filed publicly not less than 21 calendar days before qualification of the offering statement. Regulation A+ offering statements, periodic reports and any other documents required to be submitted to the SEC in connection with a Regulation A+ offering must now be filed via EDGAR. The amended Form 1-A is comprised of three parts:

  • Part I – requires basic issuer information, jurisdictions in which the securities will be offered, and sales of unregistered securities.
  • Part II – requires basic disclosures related to the offering and the issuer, including the use of proceeds, a description of the securities being offered, issuer's business, executive officers and directors, beneficial ownership, risk factors, financial statements (audited if Tier 2 issuer) and other disclosures. This is similar to Part I of Form S-1, which an issuer can choose to comply with in connection with the offering statement.
  • Part III – requires certain exhibits and related materials.

Ongoing Reporting Obligations

Tier 1 issuers will be required to file an exit report after the completion or termination of an offering. The exit report must be provided in a Form 1-Z, which includes: the date the offering was qualified and commenced, the amount of securities qualified, the amount of securities sold in the offering, the price of the securities, the portions of the offering that were sold on behalf of the issuer and any selling securityholders, any fees associated with the offering, and the net proceeds to the issuer.

Tier 2 issuers will be subject to a number of additional reporting obligations, including:

  • annual reports on Form 1-K;
  • semi-annual reports on Form 1-SA;
  • current reports on Form 1-U; and
  • special financial reports on Form 1-K and Form 1-SA.

The Form 1-K requirements are similar in scope to the Form 1-A, including audited financial statements, and must be filed within 120 calendar days of the issuer's fiscal year-end. The Form 1-SA requirements are similar in scope to the scaled disclosure required in a Form 10-Q and must be filed within 90 calendar days after the end of the first six months of the issuer's fiscal year.

Tier 2 issuers may suspend or terminate their ongoing reporting obligations on a basis similar to the provisions that allow issuers to suspend their ongoing reporting obligations under Section 13 and Section 15(d) of the Exchange Act. Regulation A+ permits a Tier 2 issuer to exit the ongoing reporting regime at any time after completing reporting for the fiscal year in which the offering statement was qualified if it has filed all required reports for the shorter of: (1) the period since the issuer became subject to such reporting obligation, or (2) its most recent three fiscal years and the portion of the current year preceding the date of filing the Form 1-Z if the securities of each class to which the offering statement relates are held of record by fewer than 300 (1,200 if the issuer is a bank or bank holding company) persons and offers or sales made in reliance on a qualified Tier 2 offering statement are not ongoing.

Offering Circular Delivery Requirements

Regulation A+ adopts an "access equals delivery" model when sales are made on the basis of offers conducted during the pre-qualification period and the final offering circular is filed and available on Edgar. Issuers are required, not later than two business days after completion of a sale, to provide purchasers with a copy of the final offering circular or a notice with the URL where the final offering circular may be obtained on EDGAR and contact information sufficient to notify a purchaser where a request for a final offering circular can be sent.

However, in the event that an issuer that is not already subject to the Tier 2 periodic reporting requirements uses a preliminary offering circular to offer securities to potential investors, the issuer will be required to deliver the preliminary offering circular to prospective purchasers at least 48 hours in advance of sales.

State Blue Sky Laws

Historically, one of the primary drawbacks of a Regulation A offering, other than the $5 million offering limitation, was the cost and time associated with the registration and qualification requirements of state blue sky securities laws. Regulation A+ provides Tier 2 issuers preemption from the registration and qualification requirements of state blue sky securities laws for securities offered or sold to "qualified purchasers," which are defined as any person to whom securities are offered or sold in a Tier 2 offering. However, Tier 1 offerings will remain subject to the registration and qualification requirements of state blue sky securities laws for each state in which the issuer offers and sells securities.

Key Takeaways

Whether Tier 1 offerings under Regulation A+ become a useful tool for raising capital remains to be seen. Historically, very few issuers have utilized the Regulation A exemption to issue securities. The increase in the permissible offering size from $5 million (under the prior version of Regulation A) to $20 million will be appealing to issuers, but the continued application of state blue sky securities laws on Tier 1 offerings reduces the attractiveness of this method of capital raising. While issuers conducting Tier 1 offerings may avail themselves of the coordinated review program developed by the North American Securities Administrators Association as it relates to state securities laws, the coordinated review program is in its infancy and may still add additional time and costs to the process.

Tier 2 offerings may be more attractive given the higher maximum offering amount of $50 million and the preemption of state blue sky securities laws. However, the ongoing reporting obligation – though significantly less burdensome than public company reporting requirements – plus the time and expense of the Tier 2 offering process itself may cause issuers that are seeking to raise between $20 million and $50 million to continue to rely on Regulation D to raise such funds from accredited investors in private placement offerings.

Effective Date

The final rules will be effective 60 days following publication in the Federal Register.

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
Aaron M. Kaslow
Erich Hellmold
Kevin Toomey
 
In association with
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
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

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