On December 19, 2018, the Securities and Exchange Commission adopted amendments to Rules 251 and 257 under the Securities Act of 1933 to allow companies that file reports under the Securities Exchange Act of 1934 to rely on the Regulation A exemption from registration for their securities offerings. The rule amendments, which were mandated by the Economic Growth, Regulatory Relief and Consumer Protection Act of 2017, are effective upon publication in the Federal Register.
Regulation A provides an exemption from the registration requirements of the Securities Act for offers and sales of securities up to $20 million in a 12-month period for Tier 1 offerings, or up to $50 million in a 12-month period for Tier 2 offerings. Under the current rules, Regulation A is not available to companies subject to the ongoing reporting requirements of Section 13 or 15(d) of the Exchange Act (or “reporting companies”). Thus, the SEC amended Rule 251 by deleting Rule 251(b)(2), which prohibits reporting companies from using Regulation A.
The amendments also add a new paragraph to Rule 257(b) to specify that the duty of an issuer that has completed an offering under Regulation A to file periodic reports under Rule 257 shall be deemed to have been met if the issuer is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act and, as of the due date of the periodic report under Rule 257, has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 12 months (or such shorter period that the issuer was required to file such reports) preceding such due date.
Consistent with these amendments, the SEC also deleted Rule 257(d)(1), which currently provides for an automatic suspension of the duty of issuers that have completed offerings under Regulation A to file reports under Rule 257 if and so long as the issuer is subject to the duty to file reports under the Exchange Act, as such an automatic suspension provision will no longer be necessary in light of the mandated amendment to deem the Rule 257(b) obligation met by Exchange Act reporting.
What Benefits Will These Amendments Provide?
In its release adopting the amendments, the SEC noted some of the benefits that the amendments may have for certain issuers. These include:
- Regulation A issuers that became reporting companies may now have the opportunity to seek follow-on Regulation A financing;
- Reporting companies that are offering securities that are not listed on a national securities exchange would be able to enjoy federal blue sky preemption to the extent that they conduct a Tier 2 Regulation A offering;
- Reporting companies that are not also emerging growth companies would obtain the additional flexibility with respect to solicitation of investor interest (i.e., “test-the-water” communications) regarding their securities offerings afforded under Regulation A; and
- Issuers conducting multiple securities offerings would benefit from the safe harbor from integration of Regulation A offerings with other offerings of securities (including registered offerings).
The SEC also noted in the adopting release that the rule amendments could be useful to issuers that either are not eligible to use a registration statement on Form S-3 or are subject to the one-third limitation on primary issuances pursuant to a Form S-3 registration statement.
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