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New Law Requires SEC to Expand Regulation A+ To Exchange Act Reporting Companies

On May 24, 2018, President Donald J. Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”). The Act, which primarily focuses on rolling back certain regulatory provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, also contained a significant change in the law for companies looking to undertake securities offerings in reliance on the revamped Regulation A (commonly referred to as “Regulation A+”) under the Securities Act of 1933.

The new legislation authorizes and directs the U.S. Securities and Exchange Commission (“SEC”) to revise its regulations and remove the requirement under Regulation A that an issuer not be subject to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”). The new law also permits an issuer’s Exchange Act periodic reports to satisfy concurrent Regulation A reporting obligations.

Previously, issuers who were subject to the periodic reporting requirements of the Exchange Act were not permitted to engage in Regulation A offerings. This development may be significant for smaller issuers with market capitalizations under $75 million who are subject to Exchange Act reporting requirements and whose securities trade on the over-the-counter markets, as larger, more seasoned issuers (as well as issuers who are listed on a national exchange such as NASDAQ or the NYSE) are potentially eligible to use Form S-3 to gain quick access to capital from investors who value free-trading securities.

Classified into two tiers based on offering size (Tier 1 and Tier 2), Regulation A permits issuers to raise up to $50 million within a 12 month period without the extensive cost and burden of a traditional registered public offering or the accredited investor and/or solicitation restrictions of Rule 506(b) or 506(c) private placements under Regulation D. Issuers are also permitted to “test the waters” with potential investors in order to gauge interest in the offering. Significantly, federal law preempts any state level “blue-sky” registration laws in Tier 2 offerings (which require audited financial statements) effectively barring states from regulating these types of securities offerings and saving issuers both time and resources needed to comply with such laws. Regulation A offerings also subject an issuer to periodic, albeit reduced reporting requirements.

These mandated changes do not have instantaneous effect. The SEC is required to conduct its rulemaking authority and amend its current regulations in compliance with federal administrative procedures. While not immediately available, we expect issuers will begin to position themselves in such a way to be prepared when this new access to capital becomes available.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.


About this Author

Alexander Yarbrough, Sheppard Mullin Law Firm, New York, Corporate Law Attorney

Alexander Yarbrough is an associate in the Corporate Practice Group in the firm's New York office.

Areas of Practice

Mr. Yarbrough concentrates his practice on advising public and private companies with regard to securities offerings, corporate finance, commercial contracts, and mergers and acquisitions. Mr. Yarbrough represents issuers and underwriters in various securities transactions, including initial public offerings, SEC Rule 144A offerings, shelf registrations, registered direct transactions,...

Jeffrey Fessler, Sheppard Mullin Law Firm, New York, Corporate Law Attorney

Jeffrey Fessler is a partner in the Corporate Practice Group in the firm's New York office. Mr. Fessler is principally engaged in the practice of corporate and securities law. His practice is focused on the representation of public and private companies, principally in the biotechnology industry. Mr. Fessler has extensive experience representing investment banks and companies in public offerings and private placements as well as exchange listings and compliance. In addition, Mr. Fessler has been involved in a wide variety of corporate transactions, including mergers and acquisitions, joint ventures, proxy contests, restructurings and private equity and debt financings. In addition to the biotechnology industry, Mr. Fessler also represents companies in a variety of industries, including technology, telecommunications, broadcasting and healthcare.

Robert L. Wernli, Jr., lawyer corporate attorney, Sheppard Mullin law firm
Special Counsel

Robert L. Wernli, Jr. is a special counsel in the Corporate Practice Group in the firm's Del Mar office.

Mr. Wernli specializes in corporate and securities law and has worked on numerous public and private capital raising transactions, mergers and acquisitions (buy-side and sell-side) and other strategic transactions. Mr. Wernli has also regularly advised clients on all aspects of SEC reporting and listing exchange compliance matters, corporate governance and general corporate law matters.

Areas of Practice

Securities. Mr....