United States: New Capital Raising Alternatives For Non-SEC Reporting Companies: Regulation A+

Non-SEC Reporting US and Canadian companies may now raise up to $50 million in a 12-month period under an expanded exemption from the registration requirements of the Securities Act of 1933 (the "Securities Act") under amendments to Regulation A; often referred to as Regulation A+. The final Regulation A+ rules were published in the Federal Register earlier this week and will become effective on June 19, 2015.

As required by the Jumpstart Our Business Start-ups Act (the "JOBS Act") enacted in 2012, the SEC adopted amendments to Regulation A, which historically provided an exemption from the registration requirements of the Securities Act for small public offerings. Prior to the adoption of the amendments, offerings under Regulation A were limited to $5 million in any 12-month period, required significant disclosure and were subject to compliance with state securities or "Blue Sky" laws. As a result, Regulation A offerings were few and far between. Instead, issuers relied on private offering exemptions like Regulation D that do not limit the amount of money that can be raised and have significantly fewer compliance requirements. Regulation A+ permits offerings of up to $50 million with reduced disclosure and compliance requirements as compared to a typical registered public offering in hopes of providing a new capital raising alternative. The potential utility of the amended rule remains subject to significant debate. Many argue that, given the $50 million maximum offering threshold, the continuing regulatory requirements and attendant costs, issuers will continue to favor other capital raising options. Others take the view that Regulation A+ will significantly alter the way that small businesses access capital.

Regulation A+ offers a potential longer-term solution to some companies with some of the benefits of being a public company, including access to capital – particularly if trading venues develop, but with reduced ongoing obligations and costs.

The amended rule creates two tiers of offerings: Tier 1 for offerings of up to $20 million in any 12-month period, and Tier 2 for offerings of up to $50 million in any 12-month period. These two tiers have different disclosure and ongoing reporting obligations. Under the amended rule, the exemption is available for sales by existing stockholders, though subject to tighter limits. The amended rule provides many of the benefits available to "emerging growth companies" under the JOBS Act, including permitting issuers to make confidential submissions to the SEC for the first offering, engage in certain test-the-waters activities and delay implementation of new accounting rules in certain circumstances. Tier 2 offerings are not subject to registration or qualification requirements under Blue Sky laws, although issuers may still be required to make filings and pay fees in states where securities are sold. Tier 1 offerings remain subject to Blue Sky laws.

Eligible Transactions

As mentioned above, the amendments provide for two tiers of offerings by US and Canadian companies that are not already subject to SEC reporting requirements under the Securities Exchange Act of 1934 (the "Exchange Act"):

  • Tier 1 offerings of up to $20 million in a rolling 12-month period, of which up to $6 million may be sold by existing stockholders; and
  • Tier 2 offerings of up to $50 million in a rolling 12-month period, of which up to $15 million may be sold by existing stockholders.

The types of securities that may be offered under Regulation A+ are limited to an enumerated list set forth in the amended rule, but includes equity securities, warrants, debt securities, convertible debt securities and guarantees. Regulation A+ is not available for sales of asset-backed securities. Regulation A+ provides for primary offerings for capital raising purposes, offerings by stockholders, securities issued upon the conversion of other outstanding securities or exercise of warrants, options or other rights or traditional shelf offerings. Notwithstanding the suggestions of commenters, the SEC did not extend the Regulation A+ exemption to at-the-market offerings.

While the amended rule provides for secondary sales by both affiliates and non-affiliates, those sales are subject to tighter limitations. The SEC recognized the tension between providing existing security-holders access to liquidity, on the one hand, and providing capital to companies and protecting investors, on the other hand. Accordingly, the amended rule limits the amount of securities that selling stockholders can sell in the issuer's first Regulation A+ offering and in any other Regulation A+ offering qualified within one year of the first offering to no more than 30% of the aggregate offering price of such offering. Sales by affiliates remain limited following the first anniversary of an issuer's initial qualification under Regulation A+ to no more than $6 million, in the case of Tier 1 offerings, or no more than $15 million, in the case of Tier 2 offerings, in each case over a 12-month period. Sales by non-affiliates are not subject to limitation following the first anniversary of an issuer's initial qualification, but will be counted for purposes of calculating compliance with the offering thresholds.

Eligible Issuers

Regulation A+ is available only to companies that are organized in, and have their principal place of business inside, the United States or Canada that are not already subject to SEC reporting requirements under the Exchange Act. However, the exemption is not available to:

  • Investment companies;
  • Special purpose acquisition companies (SPACs);
  • Business development companies (BDCs);
  • Blank check companies;
  • Companies subject to "bad boy" disqualification;
  • Issuers of fractional undivided interests in oil or gas rights;
  • Issuers that have not satisfied their ongoing reporting obligations under Regulation A+ during the immediately preceding two years; or
  • Issuers that have had their registration revoked by the SEC pursuant to Section 12(j) of the Exchange Act within the prior five years.

Investment Limitations

The amended rule limits the amount of securities that non-accredited investors (as defined under Regulation D) can purchase in a Tier 2 offering, unless the securities being sold will be listed on a national securities exchange upon qualification. Specifically, a non-accredited investor may not purchase securities with a purchase price of more than 10% of: (i) the greater of such purchaser's revenue or net assets in the case of a non-natural person or (ii) the greater of such purchaser's annual income or net worth in the case of a natural person. An issuer may rely on representations from investors to confirm compliance with these investment limitations, unless the issuer knew at the time of sale that the representation was untrue.

Offering Process

The offering process under Regulation A+ is similar to the typical registered offering process in many respects, but with some important differences, including relief from certain obligations and costs attendant to the registration process. Issuers must file their Regulation A+ offering statement with the SEC electronically via EDGAR. There are no filing fees for Regulation A+ offerings. Issuers who have not previously sold securities in a Regulation A+ offering or pursuant to registration statement under the Securities Act may submit a draft offering statement for non-public review by the SEC. All confidential filings and related correspondence must eventually be filed publicly, unless confidential treatment of particular materials has been separately requested and approved by the SEC.

The SEC has the opportunity to review and comment on offering statements before they may be qualified. An offering statement shall not be qualified less than 21 calendar days after the public filing of the offering statement, all confidential drafts of the offering statement and all non-public correspondence, subject to any separately approved confidential treatment requests.

The amended rule provides that oral offers and written offers made pursuant to a preliminary offering circular may be made prior to qualification, subject to requirements to deliver the final qualified offering statement once it is available, which in many cases is satisfied by filing the final offering statement on EDGAR.

Issuers and their representatives are permitted to contact potential investors and solicit their interest in participating in the offering, or to test-the-waters, both before and after the offering statement is filed. Companies relying on Regulation A+ can test-the-waters with all potential investors, rather than only "qualified institutional buyers" and "institutional accredited investors" as is the case for registered offerings of emerging growth companies. Solicitation materials are subject to the antifraud and other civil liability provisions of the federal securities laws and must be submitted or filed with the offering statement.

Filings with FINRA and payment of related fees will be necessary in Regulation A+ offerings in which FINRA members participate. FINRA's rules with respect to underwriting compensation would also apply.

Offering Statement – Form 1-A

The offering statement is a disclosure document that is intended to provide potential investors with information that will form the basis for their investment decision. Form 1-A, which has been amended, sets forth the content and other requirements for offering statements under Regulation A+:

  • Part I: is an online form requiring key information about the issuer, its eligibility and the offering. The SEC intends for this form to assist issuers in determining whether they satisfy the criteria to rely on Regulation A+.
  • Part II: is the narrative portion of the offering statement that requires, among other information, a description of the company's business, risk factors, information about the company's officers and directors, information about the offering and financial statements, which must be audited in the case of a Tier 2 offering.
  • Part III: requires signatures and exhibits, including organizational documents and material contracts, among others.

Ongoing Reporting and Compliance

Following termination or completion of a Regulation A+ offering, both Tier 1 and Tier 2 issuers are required to disclose information about the offering, including the date it was qualified and commenced, the amount of securities qualified, the amount of securities sold by both the issuer and selling security-holders, the price, any fees associated with the offering and the net proceeds to the issuer.

Additionally, Tier 2 issuers are required to file:

  • Annual reports on Form 1-K, with audited financial statements, within 120 days of the end of the fiscal year;
  • Semi-annual reports on Form 1-SA, within 90 days after the end of the first six months of the fiscal year;
  • Current event reports on Form 1-U, within 4 business days of the occurrence of a triggering event such as a fundamental change, change of control, change in accountants, change in officers and directors; and
  • Notice to the SEC of the suspension of their ongoing reporting obligations on Part II of Form 1-Z.

Tier 2 issuers' ongoing reporting obligations are applicable for any year in which offers and sales are made pursuant to a Tier 2 offering and for so long as the issuer has more than 300 stockholders of record.

In the final rule release, the SEC noted that these ongoing reporting obligations are intended to help foster the development of a secondary market in such securities, while balancing the compliance burden that would be imposed on smaller issuers. While the ongoing reporting provisions require a significant amount of information, Regulation A+ issuers are excepted from many of the ongoing reporting and compliance obligations applicable to public companies, including the proxy rules, quarterly reporting requirements, Section 16 reporting, Schedule 13D filings, some requirements of the Sarbanes-Oxley Act and some executive compensation disclosure requirements. But, even the significantly reduced ongoing obligations on Regulation A+ issuers are more arduous than ongoing obligations typically imposed on issuers in private offerings, which are negotiated contractual obligations and can vary widely.

Exchange Act Registration

Securities issued in a Tier 2 offering are exempt from registration under Section 12(g) of the Exchange Act if:

  • the issuer remains subject to, and is current in (as of its fiscal year end), its Regulation A+ periodic reporting obligations;
  • the issuer engages the services of a transfer agent registered with the SEC pursuant to Section 17A of the Exchange Act; and
  • the issuer has a public float of less than $75 million, determined as of the last business day of its most recently completed semi-annual period, or, in the absence of a public float, annual revenues of less than $50 million, as of the most recently completed fiscal year.

An issuer that exceeds either the public float or annual revenue thresholds, in addition to triggering the requirements to register under Section 12(g) of the Exchange Act (i.e., total assets of more than $10 million and the class of equity securities is held by more than 2,000 persons or 500 persons who are not accredited investors), would be granted a two-year transition period before it would be required to register pursuant to Section 12(g), provided it timely files all ongoing reports due during such period. An issuer entering Exchange Act reporting will be considered an "emerging growth company" to the extent that it otherwise qualifies for such status.

The amended rule also provides a simplified process for Exchange Act registration in connection with Tier 2 offerings for issuers wishing to register securities under the Exchange Act concurrent with an offering. Regulation A+ issuers may utilize the Form 8-A short form registration statement to register under the Exchange Act, if they provide expanded disclosure in the offering statement that is in-line with what would be required in a registered offering.

Secondary Markets

Since securities sold under Regulation A+ are publicly offered securities, not "restricted securities," they can generally be traded freely unlike securities sold in private placements. Additionally, broker-dealers will be able to publish quotes for securities sold in Tier 2 offerings to the extent that the issuer continues to satisfy its ongoing reporting obligations, which should facilitate a secondary market in Regulation A+ securities through the pink sheets and over-the-counter. The SEC has noted that it is considering venture exchanges as a way to provide liquidity for smaller issuers, and is contemplating the use of venture exchanges for Regulation A+ securities as part of that consideration.

Blue Sky

The amended rule provides that Blue Sky law requirements for registration or qualification are pre-empted with respect to offers and sales of securities in Tier 2 offerings. However, companies will still be required to file offering statements (in the same form filed with the SEC) with state securities regulators and pay related filing fees. Additionally, state regulators will still be entitled to police fraudulent securities transactions and unlawful activities of broker-dealers in Regulation A+ offerings.

By contrast given the anticipated more local nature of Tier 1 offerings, the SEC determined it is more appropriate for states to retain oversight over the conduct of Tier 1 offerings. In most cases, Tier 1 offerings will be subject to the multi-state coordinated review program previously implemented by the North American Securities Administrators Association for Regulation A+ offerings. The coordinated review program is intended to reduce Blue Sky law disclosure and compliance obligations for Regulation A+ offerings. The coordinated review program requires issuers to file Regulation A+ offering materials with the states electronically and contemplates a 21 business day turnaround from the time of filing of an offering statement until the issuer receives comments from the states. The coordinated review program is relatively new and there is not yet sufficient data to evaluate whether it will in fact reduce the Blue Sky law disclosure and compliance obligations of issuers in Regulation A+ offerings, but the SEC and state regulators will continue to evaluate the program going forward.

Liability

Similar to other offerings exempt from the Securities Act registration requirements, Regulation A+ offerings do not subject participants to Section 11 liability under the Securities Act. However, anti-fraud and other civil liability provisions of the federal securities laws would apply, including Sections 12(a)(2) and 17 of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5. Therefore, underwriters participating in a Regulation A+ offering will likely require a level of diligence and disclosure comparable to that required in registered offerings.

Rule Release

Final Rule Release – Amendments to Regulation A: https://www.sec.gov/rules/final/2015/33-9741.pdf.

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
Morrison & Foerster LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Morrison & Foerster LLP
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