United States: The SEC's New "Regulation A+" and The States' "M" Word

The changes mandated to Regulation A in the JOBS Act are among the least heralded yet most promising prospects for small business capital formation. The SEC adopted sweeping changes to Regulation A on March 25, 2015 to take effect 60 days after posting, in late May or so. The "elevator speech" summary of the proposed rule is that the amount an issuer can raise using this "mini-registration" exemption will increase from $5 million to $50 million, and the shares sold will be freely tradable.

As was true of old Regulation A, the exemption cannot be used by "blank check," extractive industries like oil & gas and mining companies, reporting companies, certain investment companies, and issuers affiliated with a "bad actor." The rarely used "test the waters" process remains available to filers and may be used more frequently now. All Reg. A issuers are now subject to antifraud liability imposed under Section 12(a)(2) of the Securities Act of 1933. The standard for liability here is much lower than under Rule 10b-5. Seller beware.

As there is with most proposals, there are several "yeah buts." The SEC created a two-tiered system. Under Tier 1, an issuer can raise up to $20 million. There are no minimum investor qualifications, and only reviewed, but not audited, financials are required. Sounds good. Yeah but, the offerings are subject to both SEC and state review. An issuer can opt instead to proceed under Tier 2. The states are preempted from reviewing Tier 2 deals. Yeah but, audited financials are required, sales are limited to accredited investors or non-accredited investors who invest no more than 10% of their annual income or net worth, and quarterly, annual and material event reporting is required. Sales of insider and affiliate shares are restricted under both Tiers, $6 million under Tier 1 and $15 million under Tier 2, with both limited to 30% in any trailing 12 month period.

At least one "elephant in the room" in the Reg. A+ debate was "merit review," the "M" word. It was the M word that almost tore apart the North American Securities Administrators Association ("NASAA") in the early '80s, that doomed the Revised Uniform Securities Act of 1986, and that, in large part, gave rise to NSMIA in 1996. Merit review was the heart and soul of the original "blue sky" laws, the authority of state securities administrators to deny securities registration to an offering that, in the administrator's view, was "unfair, unjust or inequitable" to, or would "tend to work a fraud" on investors. At its height in the '70s and '80s, about 36 states applied merit review standards to new offerings already reviewed for disclosure by the SEC.

While laudable in intention, making decisions based on those standards proved challenging to enforce and defend over the years. Various regional groups of regulators formed in an effort to develop regulatory guidelines for all to see. NASAA eventually assumed the role, and its committees of state analysts continue to hone "merit" standards for those states with the authority today. However, in NSMIA, Congress reduced the number of offerings subject to state registration review to a trickle. Reg. A deals currently are in that shallow pool of state-reviewed offerings.

The goals of merit review are among the most misunderstood in American finance, by critics and perhaps state regulators both. Detractors scoff at the idea that some state examiner in "East Dakota" can predict whether a company will be a good or bad investment, whether the investor will make or lose money. But that is not the idea. Merit standards are intended to make an investment "fair" to the investor. It is not intended to be a predictor of profitability (although one can argue it makes an offering more attractive).

Two classic (and often the most nettlesome for issuers) examples of merit guidelines relate to repayment of principal loans and "cheap stock." Merit states place tight restrictions on issuers using investors' money, offering proceeds, to pay off prior loans made to the company by its principals. Instead, offering proceeds must be applied to the company's operations, to generation of revenue and, with luck, profits. Also under merit review, company insiders are required to place some or all of their promoters' shares aka "cheap stock" (shares they received from the company for nothing or at a price much lower than the price investors will pay for the registered shares) in escrow until such time as the overall value of the company has increased in an amount proportional to that "cheap stock"/public price differential.

In an effort to persuade the SEC that the states should not be preempted for Reg. A+ offerings, NASAA adopted a central, coordinated registration regime wherein one examiner is appointed to review disclosure and another for merit issues, purportedly with the authority to speak for all states. Further, NASAA members adopted a resolution that its merit member states should waive compliance with these two major merit roadblocks. Whether the state regulators adhere to these collective pronouncements when back home is another question. Whether a position taken by an administrator carries through to that line examiner in East Dakota is another concern.

Regulation A+ has great promise. While it may not seem like such a big deal for issuers and counsel on the coasts, even the $20 million threshold is plenty for mid-American companies ready to make a public splash. There will be some cache in their being able to say the offering was submitted to and reviewed by regulators (even though there are limits on stating that fact) as opposed to private (and not so private) offerings under Rule 506.

The next ingredient necessary to make either Tier of Reg. A+ a success is for regional broker-dealers—many of them beaten to a pulp over the last few years over some very large and notoriously fraudulent private placements—to emerge and seize this market. Reg. A will be the focus for that next-step, small company market, if it happens at all.

As for NASAA, merit review and Reg. A+, I am torn. On the one hand, if state review is streamlined to involve only two state examiners, one from a disclosure state and one from a merit state, with some of the toughest merit standards waived, one might ask "what's the point?" Isn't the SEC's review enough? The SEC pledges that Reg. A+ offerings will receive the same degree of review as full S-1 registration filings. On the other hand, these deals are more likely to be smaller regional offerings, and who really believes an examiner sitting in an SEC cubicle in Washington, D.C. has the perspective necessary to understand an offering to be made to investors in "East Dakota?" And even if the examiner has such perspective, is that the highest and best use of the SEC's resources?

On balance, the SEC was wise to give the states a shot at jointly handling the Tier 1 offerings and raising the Tier 1 ceiling from the originally proposed $5 million to $20 million. This is akin to the $100 million asset split in investment adviser regulation. Let the states man the laboring oar on these more localized offerings and see what happens. Further, the SEC's suggestion that SEC and state examiners work jointly on review is an excellent idea, as opposed to the states getting a finished SEC product to review.

Now that the SEC has given the states the opportunity to participate in the review process, the state administrators have got to take the lead with their staffs. Whether it be by weekly sit-downs with line examiners, or some other check and balance, state administrators must make sure their personal policy "seal of approval" is on every position taken by their examiners. It will only take one or two "horror stories" to ruin it for state authority across the board. "Rogue" examiners and states will not be acting solely for themselves in "East Dakota" but for every state securities authority in the country. All states must remember the three guiding, state regulatory "P" words: Principle, Politics and Preemption. And not necessarily in that order.

Reg. A is no longer merely the answer to a securities trivia question. It may become the best thing to come out of the JOBS Act. Only time will tell.

What follows is a table in which some of the more salient features of the two tiers are laid out. After that, I discuss some practical considerations that may give some perspective on what the new Regulation A will and will not mean for those awaiting its promulgation.


Both Tiers
Freely tradable securities
No blank checks or "extractive industries" (oil & gas, mining)
"Test the Waters"
'33 Act Sec. 12(a)(2) private liability

Reality Check

Before the small company issuer community uncorks the champagne, it is important to recognize some practical realities and limitations about the new Regulation A regime.

SEC Review. Both Tier 1 and Tier 2 offering statements will be reviewed by the SEC's Division of Corporation Finance examiners, and Corp Fin is on record as stating that Reg. A offering statements are subjected to the same regulatory scrutiny as any S-1 registration filing, applying Regulations SK disclosure and SX accounting standards. Preparation of a Reg. A offering statement is going to require significant legal and accounting expense.

Registrations by Qualification. At the state level, Regulation A offerings are registrations by qualification, i.e., full registrations, akin to S-1 filings with the SEC. There is no Reg. A exemptive complement at the state level, nor did the SEC impose Reg. A on the states. At the state level, registration by qualification filers are usually required (either by state statute or rule or both) to provide audited financials. So, under Tier 1, although the SEC will not require them, the states might and might have to require them (absent waiver authority), making the Tier 1 waiver rather meaningless.

Merit Review. Generally, merit states have the power to limit sales by insiders and affiliates more strictly than the SEC's Tier 1 limits. Even with waiver of loan repayment and cheap stock guidelines, merit states might pose problems here. Merit review can be avoided by selling shares exclusively in those states that do not apply merit standards, i.e., the "disclosure" states.


Financials. At least in middle America, offerings of more than $10 million by early stage or other lesser known private companies are likely going to have to be made by one or more broker-dealers to succeed. Will these broker-dealers be willing to take on an offering by such a company that does not have audited financials, regardless of what the regulators require?

Reporting. It is one thing to say that shares will be freely tradable, and another to say there is a market for them. Will broker-dealers be able to market the shares to investors on the basis they are freely tradable if the company does not commit to making periodic, public reporting? Will the Tier 1 reporting waiver even be relevant?

Suitability. While there may be no investor qualifications in Tier 1, and only limited qualifications in Tier 2, the SEC did not exempt broker-dealers that sell the securities from their suitability obligations. Will such offerings be "suitable" investments for non-accredited investors, even if the investors are investing less than 10% of income or net worth?

FINRA. How will FINRA's Corporation Finance section handle these new Reg. A offerings made by their member firms on behalf of client issuers? Will FINRA apply full registration review to the offerings, or will the deals be treated as some sort of exempt offering with lesser or no standards imposed? It is highly unlikely FINRA will ease its suitability requirements on broker-dealers. Nor are the states likely to do so.

Section 12(a)(2). Under this section of the Securities Act of 1933, a "seller" of securities is liable to the "buyer" for making any untrue statement of material fact or for omitting to state a material to the buyer that makes what was said misleading. (Unlike under Rule 10b-5, there is no remedy under Section 12(a)(2) for a seller defrauded by the untrue statement or omission of a fraudulent buyer.) The only defense under 12(a)(2) is that the seller did not know, and reasonably could not have known, of the untruth or omission. The seller is strictly liable for any such material untrue or omitted fact unless the seller can establish he was not negligent in not discovering the untruth or omission. That is tough to do. Most other liability under federal securities law requires a much greater degree of seller intent to defraud or scienter than under Section 12(a)(2). This section lost a lot of its punch after Gustafson v. Alloyd, 513 U.S. 561 (1995), when the U.S. Supreme Court ruled it applied only to "public" offerings. Congress breathed new life into the provision in the JOBS Act when it made those who offer and sell under Regulation A (and the crowdfunding exemption, whenever those enabling rules are promulgated) subject to Section 12(a)(2) liability. This constitutes important and very potent new issuer and seller liability.

Crowdfunding. With the exception of the Tier 2 investor qualifications, there are no other limitations imposed in the new Reg. A on how the offerings may be offered and sold. So, an issuer can employ crowdfunding to sell its offering once it has been cleared for use by regulators. It remains to be seen if up to $50 million offerings can succeed using crowdfunding.

SEC Registration. With both the new Regulation A and Rule 506(c) (publicly offered private offering solely to accredited investors) in place, it is hard to imagine why any company not already public would register an offering of less than $50 million (unless a "blank check," oil & gas or penny stock offering or "bad actor" disqualified) with the SEC.

Venture Exchanges. The idea of establishing an exchange to complement the tradable shares sold in Reg. A offerings as well as secondary market shares of other, lesser known companies has gained some traction of late. None exists at present save for "pink sheet" trading on the Internet. Lack of liquidity is a chronic problem in small company investing. It makes it difficult to sell the shares in the first place, and later down the road. The balancing factor is the hope the investor is getting in on the ground floor of the next Apple, Microsoft or Google. Independent analysts are unlikely to follow such small companies in any significant strength, leaving understanding the company and its future to the individual investor, with limited reliable public information on which to base an investment decision. It is entirely unclear how a centralized marketplace for these lesser known securities would be able to operate at sufficient volume to make it worthwhile. Will broker-dealers, market makers, independent analysts and serious investors pay any more attention to such securities on a venture exchange than they already pay to them on line as "pink sheet" companies? Pink sheet shares are far more often accompanied by questionable Internet hype, shorting and momentum trading than fundamental valuations. How will an exchange improve that situation? There is much to do before any such concept comes to fruition.

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.

In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

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.


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.


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 by clicking here .

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.


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.


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.


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.


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.