United States: A Guide To Regulation A+

Introduction

Significant changes to Regulation A, generally referred to as Regulation A+, went into effect on June 19, 2015.

Old Regulation A

Regulation A is a previously existing exemption from the registration requirements of the Securities Act of 1933 (Securities Act) for nonpublic companies seeking to raise smaller amounts of capital. Even before the new rules went into effect, Regulation A already had several useful features. Regulation A gave smaller companies access to public markets without registration. There were no limitations on who could purchase the securities, and the securities sold were freely tradable by non-affiliates. General solicitations were allowed. Issuers could also "test the waters" and gauge investor interest before launching the offering (subject to certain state law requirements). Yet despite these features, Regulation A had been used relatively infrequently for several years. According to a recent GAO Report, there was just one qualified offering made in 2011, down from only 57 in 19981.

There are many reasons for Regulation A's lack of popularity. First and foremost, the amount of money that could be raised in a Regulation A offering was capped at $5 million. Second, the qualification process was extremely cumbersome and costly. In addition to a lengthy federal review process, the offerings were also subject to state law securities registration and review requirements, otherwise known as the "blue sky" laws. The cost and time involved with working through both the federal qualification process and the various blue sky laws was significant. Simply put, Regulation A offerings were not cost-effective.

Regulation A+

Regulation A+ contains many changes designed to address these problems. The goal of the new rules is to transform Regulation A into a workable capital-raising tool for small private companies.

As mandated by the Jumpstart Our Business Startups Act (JOBS Act), the U.S. Securities and Exchange Commission (SEC) increased the amount that can be raised by an issuer under the exemption from $5 million to $50 million and created two offering categories:

Tier 1 for offerings up to $20 million

Tier 2 for offerings up to $50 million

Investor protections have been included for Tier 2 offerings, such as requiring audited financial statements in offering materials, ongoing reporting requirements and an investment cap for non-accredited investors.

Regulation A+ also dramatically transforms the regulatory review framework for these offerings. Tier 2 offerings preempt state securities regulatory review, a change strongly supported by business interests and vehemently opposed by state securities regulators. As is described below under "State Securities Regulation – Preemption of State Regulation for Tier 2," the controversy surrounding state law preemption continues.

The SEC has also crafted an offering and disclosure regime unique to Regulation A+ and specifically designed with smaller startup companies in mind. The new rules modernize the qualification, communications and offering processes, incorporating into Regulation A+ offerings many features currently enjoyed by issuers in registered offerings, such as allowing for confidential submissions and adopting a notice-equals-access model.

In her October 28, 2015, keynote address to Practising Law Institute's 47th Annual Securities Regulation Institute, SEC Chair Mary Jo White indicated that it is too early to draw conclusions on Regulation A+ and stated:

Companies are beginning to take advantage of the new rules in greater numbers than was the case under the prior version of the exemption, with approximately 34 companies publicly filing offering statements and 16 companies filing non-public draft offering statements. The staff has qualified three offerings so far, and it remains to be seen how investors will react to such offerings.

This white paper explains Regulation A+ and the considerations that should be taken into account in deciding whether to use it.

Regulation A+ Offering Size Options

Two offering size levels are available under Regulation A+.

Tier 1 – offerings of up to $20 million over a rolling 12-month period

Tier 2 – offerings of up to $50 million over a rolling 12-month period

As explained in more detail below, both tiers are subject to certain basic requirements, while Tier 2 offerings are subject to additional investor protections. Issuers raising up to $20 million can choose to use either Tier 1 or Tier 2. Tier 1 offerings can include no more than $6 million in securities offered by selling security holders who are affiliates of the issuer. Tier 2 offerings can include no more than $15 million in securities offered by selling security holders who are affiliates of the issuer.

If the issuer is selling convertible securities, and these securities are convertible within the first year after qualification or at the discretion of the issuer, the value of the underlying securities must be included in the aggregate offering size. If the price of the underlying securities uses a pricing formula, the issuer must use the maximum estimated price.

Congress built an adjustment feature into Regulation A+. Every two years the SEC must review the $50 million offering amount limitation and, if appropriate, increase it. If the SEC decides not to increase the offering limit it must report back to Congress its reasons supporting this decision. The first review is expected by April 2016.

Secondary Sales

One of the important features of Regulation A+ is the ability of selling security holders to participate in the offering, known as secondary sales. The SEC hopes to encourage investment in startup companies by giving investors access to liquidity through secondary sales as a part of a qualified Regulation A+ offering. However, the SEC acknowledged that such secondary sales could potentially place new investors at an informational disadvantage and noted that secondary sales do not directly provide any new capital to issuers. So the SEC built into the new rules some important restrictions on these sales.

In an issuer's first Regulation A+ offering and for the 12 months following its first offering, sales by security holders are limited to no more than 30 percent of the aggregate offering price of a particular offering. This limitation applies to sales by both affiliates and non-affiliates of the issuer.

After the end of this period, secondary sales by affiliates over a 12-month period will continue to be subject to this 30 percent limitation. At this point, secondary sales by non-affiliates will only be limited to the maximum offering amount permissible under each tier ($20 million for Tier 1 and $50 million for Tier 2). Nevertheless, such amounts will be aggregated with the sales by the issuer and affiliates when calculating the maximum amount allowed under the appropriate tier.

Previously, Rule 251(b) banned all affiliate resales under Regulation A unless the issuer had net income from continuing operations in at least one of its last two fiscal years. This rule was designed to address the information disadvantage issue for new investors. With Regulation A+ the SEC has eliminated this rule. The SEC described the rule as no longer necessary due to the increased sophistication and robust nature of its current disclosure review process, qualification procedure and enforcement programs.

See "Resale Issues" below for a discussion of several reasons why secondary sales outside of a qualified Regulation A+ offering may be complicated.

Who is Eligible to Use Regulation A+?

Eligible Issuers

Only companies that are organized in, and have their principal place of business in, the United States or Canada are eligible to engage in a Regulation A+ offering.

An issuer will be considered to have its "principal place of business" in the United States or Canada for purposes of determining eligibility to use Regulation A+ if its officers, partners or managers primarily direct, control and coordinate the issuer's activities from the United States or Canada.

The following entities are not able to use Regulation A+:

  • Companies subject to reporting under the Securities Exchange Act of 1934 (Exchange Act), other than voluntary filers
  • Investment companies and business development companies
  • Blank check companies
  • Certain bad actors
  • Issuers of fractional undivided interests in mineral rights
  • Issuers who failed to file ongoing reports required by Regulation A+
  • Issuers subject to an SEC order within five years denying, suspending or revoking registration of a class of securities pursuant to Section 12(j) of the Exchange Act

A company that was previously required to file reports with the SEC under Section 15(d) of the Exchange Act, but has since suspended its Exchange Act reporting obligation, is eligible to use Regulation A+.

A private, wholly owned subsidiary of an Exchange Act reporting company is eligible to sell securities pursuant to Regulation A+, but the Exchange Act reporting company parent cannot be a guarantor or co-issuer.

While the SEC received many comment letters supporting expansion of the availability of Regulation A+, the SEC stated that it wanted to observe the market practices that will develop under these new rules before considering this kind of expansion.

Bad Actor Disqualification

Regulation A+ provides for the disqualification of certain "bad actors" (Rule 262). The Regulation A+ bad actor provisions are substantially the same as the recently adopted bad actor provisions of Rule 506 (except that in the case of certain orders, the order must bar the covered person at the time of filing the Regulation A+ offering statement).

Under Regulation A+, offerings that would have been disqualified from reliance on old Regulation A will continue to be disqualified. Triggering events that were not previously included in the bad actor rules for old Regulation A that predate effectiveness of Regulation A+ do not cause disqualification, but instead need to be disclosed in a manner similar to Rule 506(e).

The SEC also adopted a reasonable care exception to the Regulation A+ disqualification provisions on a basis consistent with Rule 506(d), so that an issuer will not be disqualified from using the Regulation A+ exemption if the issuer can show that it did not know, and in the exercise of reasonable care could not have known, of the disqualifying event.

To continue reading this white paper, please click here.

Footnotes

1 Factors that May Affect Trends in Regulation A Offerings, GAO-12-839 (July 2012) (available at: http://www.gao.gov/assets/600/592113.pdf) (the "GAO Report").

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
Bradley Arant Boult Cummings LLP
Jones Day
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Bradley Arant Boult Cummings LLP
Jones Day
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