Access To Capital For Small Businesses: SEC Adopts Final Rules To Implement "Regulation A+" Offering Exemption Under The JOBS Act
The new Regulation A offering exemption, which the SEC recently adopted under Title IV of the JOBS Act, has taken effect.
United States
Corporate/Commercial Law
Introduction
The new Regulation A offering exemption, which the SEC recently
adopted under Title IV of the JOBS Act, has taken effect. The new
rules, also known as "Regulation A+," permit unregistered
public offerings of up to US$50 million in any 12-month period by
eligible US and Canadian companies.
Regulation A+ reflects Congress' determination to facilitate
access to capital for smaller companies. As set out in greater
detail in the chart below, the new rules permit unregistered public
offerings under two tiers: "Tier 1" for offerings of up
to US$20 million, including no more than US$6 million on behalf of
selling security holders and "Tier 2" for offerings of up
to US$50 million, including no more than US$15 million on behalf of
selling security holders. For offerings of up to US$20 million, the
issuer can elect whether to proceed under Tier 1 or Tier 2.
SEC rule changes implementing Regulation A+
The new rules contain several changes compared to the version of
the Regulation A+ rules which the SEC first proposed in 2013.
Compared to the 2013 proposal, the final rules:
- Raise the upper limit for Tier 1
offerings from US$5 million to US$20 million
- Limit sales by selling security
holders to less than 30 percent of the issuer's initial and
subsequent offerings for the 12-month period following its initial
offering
- Exempt from limits on Tier 2 investor
purchases those sales made to "accredited investors" as
well as any sale of securities that will be listed on a national
exchange upon qualification
- Permit an issuer in Tier 2 offerings to audit its financial
statements in accordance with either US Generally Accepted Auditing
Standards (GAAS) or Public Company Accounting Oversight Board
(PCAOB) auditing standards
- Increase the threshold of
unregistered shares that may be sold from five percent to 10
percent or more of outstanding equity before such shares constitute
a "fundamental change" for the purposes of Form 1-U
- Exempt securities issued under Tier 2
from the requirements under Section 12(g) of the Securities
Exchange Act of 1934 (the Exchange Act), provided that the issuer
uses a registered transfer agent, is current in filing required
reports, and has a public float of less than US$75 million or
annual revenues of less than US$50 million
- Permit an issuer making an offering
under Tier 2 to register the class of securities under the Exchange
Act by filing only a short form Exchange Act registration statement
on Form 8-A concurrently with the qualification of the Regulation A
offering statement
Regulation A+ builds on the existing Regulation A promulgated
under the Securities Act of 1933. Both the Tier 1 and Tier 2
exemptions from registration draw from the provisions of the old
Regulation A, such as the eligibility of issuers and securities,
certain disclosure requirements and the civil liability provisions
of Sections 12(a)(2) and 17 of the Securities Act. Similar to
Regulation A, both tiers under Regulation A+ exclude from
integration prior offers or sales of securities and certain
subsequent offers or sales of securities, including in particular
crowdfunding offerings under the recently adopted Section 4(a)(6)
of the Securities Act. Additionally, Regulation A+, like Regulation
A, permits the use of solicitation materials before filing an
offering statement.
The new rules also modernize the older version of Regulation A,
which was rarely used, with respect to the SEC filing and offering
process for both Tier 1 and Tier 2 offerings.
Regulation A+ now requires electronic filing via EDGAR of
offering materials, extends the "access equals delivery"
model to final offering circulars and allows "electronic
only" offerings. Importantly, securities issued under either
tier are not considered "restricted securities" within
the meaning of Rule 144 under the Securities Act, and therefore
investors who are not affiliated with the issuer may freely resell
them under the Securities Act.
Ongoing reporting
The two-tier Regulation A+ regime moves away from a "one
size fits all" approach that characterized Regulation A.
Regulation A originally required issuers, regardless of offering
size, to file ongoing reports on the now rescinded Form 2-A every
six months after qualification and within 30 calendar days
following termination. Under Regulation A+, issuers that conduct
offerings under Tier 1 have no ongoing reporting requirements other
than to file an exit report on Form 1-Z upon termination of the
offering. Issuers that conduct offerings under Tier 2 must file
annual reports on Form 1-K, semiannual reports on Form 1-SA,
current reports on Form 1-U, special financial reports, and exit
reports on Form 1-Z. In addition, issuers of Tier 2 offerings,
unlike Tier 1 offerings, must file audited financial statements
prepared in accordance with US GAAP (or International Financial
Reporting Standards, as issued by the International Accounting
Standards Board, in the case of Canadian issuers).
State securities law
Regulation A+ distinguishes between Tier 1 offerings and Tier 2
offerings in the preemption of US state securities laws. Securities
offerings under former Regulation A required full compliance with
state securities laws. Under the JOBS Act, securities offered or
sold to "qualified purchasers" are exempt from state law
registration and qualification requirements. Regulation A+ brings
within the definition of "qualified purchasers" persons
to whom securities are offered or sold in a Tier 2 offering.
Accordingly, Tier 2—but not Tier 1—offerings preempt
state securities laws, other than antifraud provisions. The SEC
expects Tier 1 offerings to be more local in nature, and therefore
they remain appropriate for state jurisdiction. Securities sold in
both Tier 1 and Tier 2 offerings remain subject to state securities
laws with respect to resales.
Investor protection
The SEC implemented investor protection policies in Regulation
A+. Investors in an individual Tier 2 offering are limited to
investing no more than 10 percent of their net worth or annual
income (or no more than 10 percent of the greater of annual revenue
or net assets at fiscal year end for non-natural persons), except
such limits do not apply to accredited investors or to securities
that will be listed on a national exchange upon qualification. To
improve access to information for all investors, the SEC under
Regulation A+ requires companies to disclose financial information
as part of their offering. The SEC also borrowed provisions from
Regulation D to protect investors by disqualifying companies that
are "bad actors" from using Regulation A+.
Regulation A+ subjects issuers to greater liability for fraud
compared to private offerings conducted under Securities Act
Section 4(a)(2), Rule 506 or Rule 144A. Offers and sales of
securities under both Regulation A+ and the private offering
exemptions subject issuers to liability for fraud under Section
10(b) of the Exchange Act which requires a plaintiff to prove
scienter before imposing liability for any material misstatement or
omission in the offering process. Offerings under Regulation A+
subject issuers to additional liability under Sections 12(a)(2) and
17 of the Securities Act, under which liability may be based on
merely negligent conduct rather than the higher standard of
scienter.
The following chart summarizes the main provisions of Regulation
A+ under each tier of the final rules, including with respect to
issuer eligibility and disclosures:
TIER
1 |
TIER
2 |
Offering limits |
Up to US$20 million in
any 12-month period, including up to US$6 million offered by
selling security holders |
Up to US$50 million in
any 12-month period, including up to US$15 million offered by
selling security holders |
Investor purchase limit |
None |
- Securities purchased (a) for natural persons, cannot exceed 10
percent of the greater of the investor's annual income or net
worth and (b) for non-natural persons, cannot exceed 10 percent of
the greater of annual revenue or net assets at fiscal year end
- No investment limit for "accredited investors," as
defined in Regulation D, or for sales of securities that will be
listed on a national securities exchange
- Issuers may rely on investor representations unless the issuer
was aware at the time of sale that the representations were
untrue
|
State securities law pre-emption |
State securities laws
apply |
State securities laws
preempted (other than anti-fraud provisions) |
Eligible issuers / eligible securities |
- Non-reporting US and Canadian issuers
- Equity securities (including warrants)
- Debt securities
- Debt securities convertible or exchangeable into equity
securities
- Guarantees of eligible securities
|
Disqualified entities |
- Exchange Act reporting companies
- Non-US and non-Canadian companies
- Investment companies, including business development
companies
- Blank check companies and special purpose acquisition
companies
- Issuers of fractional undivided interests in oil, gas or
similar mineral rights
- Issuers subject to an order within the previous five years
denying, suspending or revoking the registration of a class of
securities under Section 12(j) of the Exchange Act
- Companies that have failed to file with the SEC ongoing reports
required by the final Regulation A rules during the two years
preceding the filing of a new Regulation A offering statement
- Companies subject to "bad actor" disqualification
under provisions substantially similar to those in Regulation
D
|
SEC
filing requirements / confidential submission
provisions |
- The issuer must file electronically via EDGAR the offering
statement, ongoing reports required for Tier 2 offerings and other
Regulation A filings
- Offering statements remain subject to review and comment by the
SEC staff prior to use
- The new rules permit confidential filing of draft offering
statements if:
- The issuer has not previously sold securities pursuant to a
qualified offering statement under the new Regulation A or an
effective registration statement
- The non-publicly submitted offering statement is substantially
complete upon submission and submitted electronically via EDGAR,
and
- The issuer files all non-public submissions as exhibits to the
offering statement not less than 21 calendar days before
qualification of the offering statement
|
Financial statement disclosures |
- US GAAP compliant financial statements (IFRS permitted for
Canadian issuers) as of the two most recently completed fiscal year
ends (or for such shorter time that the issuer has existed)
- Financial statements must be dated not more than nine months
before submission, filing or qualification. Interim financial
statements, if required, must cover a period of at least six
months
- Financial statements of certain non-issuer entities, such as
significant acquired businesses and subsidiary guarantors, in form
and content following the requirements set out in Part F/S of Form
1-A and pro forma information regarding significant business
combinations
- Issuer may delay the implementation of new accounting standards
to the extent such standards provide for delayed implementation by
non-public business entities, but the issuer must disclose its
election of such delay at the time the issuer files the offering
statement and must apply the same choice to all standards
|
- No audit requirement, but issuer must label unaudited financial
statements as unaudited
- Issuer must provide audited financial statements if the issuer
has already prepared these in accordance with US GAAS or PCAOB
auditing standards, and the auditor followed Regulation S-X or
AICPA auditor independence standards
- No requirement for issuer's financial statements to comply
with Regulation S-X except as guidance to identify non-issuer
entities required to submit financial statements, where the form
and content of such financial statements conforms to Part F/S of
Form 1 A
|
- Issuer must provide audited financial statements audited in
accordance with US GAAS or PCAOB auditing standards, and the
auditor must follow Regulation S-X auditor independence
standards
- PCAOB-registered auditor not required
- Issuer must comply with Article 8 of Regulation S-X as if
issuer were a "smaller reporting company"
|
Form
and content of offering statement on Form 1A |
- Offering statements receive the same level of SEC staff review
as registration statements, contain substantive narrative and
financial information about the issuer, and must be qualified by
the SEC before sales may be made.
- Regulation A offering statements must be filed with the SEC on
Form 1-A. Form 1-A consists of these parts:
- Part I: Part I requires disclosure of the
following: (1) the issuer, including its industry, number of
employees, financial statements, capital structure and contact
information; (2) issuer eligibility; (3) applicability of "bad
actor" disqualification and disclosure, requiring the issuer
to certify that no disqualifying events have occurred and to
disclose any disqualifying activities; (4) summary information
about the offering and other current or proposed offerings,
including whether the issuer is conducting a Tier 1 or Tier 2
offering; (5) the jurisdictions where the offering will be made;
and (6) unregistered securities issued or sold within the last
year.
- Part II: Part II offering statement
disclosures require:
- Basic information about the issuer and the offering, including
underwriting information
- The most significant factors that make the offering speculative
or substantially risky
- Material differences between the public offering price and the
effective cash cost for shares acquired by insiders during the past
year
- A plan of distribution for the offering and disclosure
regarding selling security holders
- Use of proceeds
- Business operations for the past three fiscal years, or since
inception if shorter
- Material physical properties
- MD&A covering the two most recently completed fiscal years
and interim periods, if required
- Information about directors, executive officers and significant
employees, including five-year business experience background,
legal proceedings, family relationships within the management
group
- Group-level executive compensation for the most recent year for
the three highest paid executive officers or directors with Tier 2
requiring individual disclosure regarding the three highest paid
executive officers or directors
- Beneficial ownership of voting securities by executive
officers, directors and 10 percent owners
- Related person transactions
- Material terms of the securities being offered
- Any events that would have triggered disqualification of the
offering under Rule 262 if the issuer could not rely on the
provisions in Rule 262(b)(1)
- Part III: Part III requires exhibit
information similar to the exhibits required in Form S-1.
|
Short-form Exchange Act registration |
|
- Issuers may register securities under the Exchange Act and,
assuming the issuer meets the applicable listing requirements, list
the securities on a national exchange by filing only a short-form
Exchange Act registration statement on Form 8-A
|
Ongoing reporting obligations |
- Issuers must file Form 1-Z to report sales after the
termination or completion of the offering within 30 calendar days
after such completion or termination
|
- Annual reports on Form 1-K, due within 120 calendar days of the
issuer's fiscal year end
- Part I: Basic issuer information, similar to
Part I for an Offering Circular
- Part II: Covers the following: business
operations for the prior three fiscal years, related person
disclosures, beneficial ownership reporting, information about
directors, executive officers and significant employees, executive
compensation disclosures, MD&A and two years of audited
financial statements
- Semiannual reports on Form 1-SA, due within 90 calendar days
after the end of the first six months of the issuer's fiscal
year, consisting primarily of financial statements and
MD&A
- Current reports on Form 1-U, within four business days of any
of the following events: material transactions that would result in
a "fundamental change" in the nature of the issuer's
business; bankruptcy; material modification of shareholder rights;
changes in the issuer's accountant/auditor; non-reliance on
prior financial statements; changes in control; departure of PEO,
PFO or PAO; and unregistered shares of 10 percent or more of
outstanding equity securities
- "Special financial reports" on Form 1-K and Form 1
SA, including audited financial statements for the issuer's
last completed fiscal year (or for the life of the issuer if less
than a full fiscal year), due within 120 days after the
qualification of the offering statement if such statement did not
include audited financial statements
- Termination reports on Form 1-Z to report sales after the
termination or completion of the offering within 30 calendar days
after such completion or termination
- In connection with a succession by merger, consolidation,
exchange of securities, acquisition of assets, or otherwise,
issuers of Tier 2 offerings who succeed issuers of a class of
securities not subject to Regulation A reporting requirements must
continue to file reports required of the original Tier 2 issuer,
but such successor issuers may suspend or terminate their reporting
obligations on the same basis as the original issuer under Rule
257(d)
|
"Test the waters" communications |
- Issuers may test the waters with all potential investors and
use solicitation materials before and after filing the offering
statement, subject to rules on filing solicitation materials and
disclaimers
- Issuers must file solicitation materials as exhibits to the
offering statement when the offering statement is submitted for
non-public review or filed; issuers must update such solicitation
materials for substantive changes
- After publicly filing an offering statement, issuers must
either attach to test the waters materials the current preliminary
offering circular or provide notice to investors on where to obtain
the offering circular, such as providing the URL to where the
investor can obtain the preliminary offering circular or offering
statement
- The new rules do not require issuers to submit solicitation
materials at or before the time of first use
|
Liability |
- Liability under Section 12(a)(2) of the Securities Act for any
offer or sale by means of solicitation materials, an offering
circular or oral communication that includes a material misleading
statement or misstatement or omission
- Liability under other anti-fraud provisions, such as Section 17
of the Securities Act, Section 10(b) of the Exchange Act and Rule
10b-5 of the Exchange Act
|
Integration |
- Offerings made under Regulation A are not integrated with other
registered offerings or exempt offerings, provided each such
offering complies with the relevant offering exemption
requirements
- Specific non-integration safe harbor for crowdfunding offerings
of securities completed pursuant to Section 4(a)(6) of the
Securities Act
- Specific non-integration provision regarding a registered
offering that follows an abandoned Regulation A offering, provided
the issuer did not solicit interest from persons other than
qualified institutional buyers (QIBs) and accredited investors
|
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
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