October 27, 2021

Volume XI, Number 300

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SEC Adopts Final Rule Expanding Regulation A Exemption to Exchange Act Reporting Companies

The Securities and Exchange Commission (SEC) last week adopted a final rule amending Regulation A to broaden eligibility for its exemption from full SEC registration. The amendments will soon allow "reporting companies"—entities subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act)—to rely on the Regulation A exemption from some SEC reporting requirements for securities offerings.

The new rule amends Regulation A—which provides an exemption for offerings up to $50 million in a 12-month period—to "provide reporting companies additional flexibility when raising capital," SEC Chairman Jay Clayton stated.

The amendments—effective once published in the Federal Register, expected in the coming weeks—provide that compliance with Exchange Act reporting requirements will also cover the reporting requirements under Regulation A.

The SEC anticipates the amendments will affect U.S. and Canadian reporting companies seeking to conduct a public offering within the Regulation A offering limits.

Amendments to Regulation A Eligibility

The SEC adopted amendments to Regulation A in 2015 exempting from the registration requirements of the Securities Act offerings of up to $50 million of securities annually, and establishing issuer eligibility requirements and ongoing reporting requirements for issuers in Regulation A offerings. Regulation A offerings are intended to make access to capital possible for small and medium-sized companies that could not otherwise bear the costs of an SEC registration, while allowing non-accredited investors to participate in the offering. Under current Rule 251(b)(2), Regulation A is not available to companies subject to the ongoing reporting requirements of Section 13 or 15(d) of the Exchange Act. However, as mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Economic Growth Act), which President Trump signed into law on May 24, 2018, the SEC amended Regulation A by deleting Rule 251(b)(2), thereby permitting Exchange Act reporting companies to offer and sell securities in reliance on the Regulation A exemption. The SEC also made conforming changes to Form 1-A to address this change in eligibility.

The amendments make clear that Exchange Act reporting companies relying on Regulation A are required, at a minimum, to include in their Form 1-A filing for a Regulation A exempt offering financial statements for the two previous fiscal years (or a shorter period during which they have been in existence). The financial statements must, at a minimum, be prepared in accordance with the form and content requirements of Part F/S of Form 1-A. Under Rule 252 of Regulation A, however, issuers must include in their offering statement “any other material information necessary to make the required statements, in light of the circumstances under which they are made, not misleading.” As a result, it may be necessary for Exchange Act reporting companies to include any more recently issued audited or reviewed financial statements prepared in accordance with the standard required for the company’s Exchange Act reports.

Regulation A Ongoing Reporting Requirements for Exchange Act Companies

Under current Rule 257(b), an issuer that has filed an offering statement for a Tier 2 offering that has been qualified pursuant to Regulation A must file specified periodic and current reports with the SEC. The Economic Growth Act provides that an issuer’s Regulation A reporting obligations will be deemed satisfied if the issuer “meets” its Exchange Act reporting requirements. Accordingly, the SEC amended Rule 257(b) by adding new subsection (6) in order to specify that the reporting requirements under Rule 257 will be deemed satisfied if the issuer is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act and, as of the due dates for each Form 1-K and Form 1-SA (i.e., the annual and semi-annual report forms for Regulation A offerings, respectively), has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 12 months (or shorter period that the registrant was required to file such reports) preceding the due date. In light of this change, the SEC deleted Rule 257(d)(1), which currently provides for an automatic suspension of the duty to file reports under Rule 257 if and so long as the issuer is subject to the duty to file reports required by Section 13 or 15(d) of the Exchange Act. The SEC also made conforming changes to Rule 257(e) to clarify the reporting requirements in the event an Exchange Act reporting company terminates or suspends its reporting obligations under the Exchange Act.

The SEC's Adopting Guidance

The adopting release contained clarifying guidance on the application and use of Regulation A following the amendments:

New or Revised Accounting Standards

Part F/S of Form 1-A permits issuers, where applicable, to delay the implementation of new accounting standards to the extent such standards provide for delayed implementation by non-public business entities, similar to accommodations for emerging growth companies under Section 102(b) of the Jumpstart Our Business Startups Act. The SEC clarified in the release that this accommodation will not apply to Exchange Act reporting companies.

Canadian Issuers

The adopting release also clarifies that a Canadian reporting company issuer, whether filing with the SEC under the Exchange Act multijurisdictional disclosure system (“MJDS”) or not, will be deemed to have met its Rule 257 reporting obligations so long as it is current in its applicable Exchange Act reporting obligations. The disclosure requirements for Canadian issuers reporting under the MJDS will continue to be established under home country standards.

Securities “Held of Record” for Section 12(g) Purposes

Securities issued in a Tier 2 offering under Regulation A by certain smaller reporting companies may, subject to certain conditions, be excluded from the count of securities “held of record” for purposes of Section 12(g) of the Exchange Act. Because this section was not amended, securities issued by Exchange Act reporting companies in a Tier 2 offering would be excluded from the “held of record” count.

Impact of the Changes

As a result of these changes, an Exchange Act reporting company will be eligible to rely on the Regulation A exemption from registration for securities offerings within the Regulation A threshold. Upon qualification of a Tier 2 offering, an Exchange Act reporting company will become subject to the ongoing reporting requirements of Regulation A. However, as long as the issuer remains current in its Exchange Act reporting, it can rely on meeting its Exchange Act reporting requirements to satisfy its ongoing reporting obligation under Regulation A.

The amendments may generally afford issuers additional flexibility in raising capital at lower costs. As noted in the final rules adopting release, the SEC anticipates that “the amendments will likely have the most impact on issuers in offerings of securities that fall within Regulation A offering limits and that are not listed on a national securities exchange,” as Tier 2 securities offering will qualify for blue sky preemption, which is generally not available for non-exchange-listed securities sold in registered offerings.

On the other hand, the SEC believes that the amendments may affect Regulation A issuers that are not reporting companies to the extent that they compete for capital with reporting companies that are newly eligible to use Regulation A. Moreover, in the SEC’s view, the flexibility afforded by the amendments may lead some new issuers that are not reporting companies, and that have not previously conducted a public offering, to seek Regulation A financing or to become a reporting company.

Copyright © by Ballard Spahr LLPNational Law Review, Volume VIII, Number 362
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About this Author

Gerald Guarcini, Ballard Spahr Law Firm, Philadelphia, Corporate and Finance Law Attorney
Partner

Gerald J. Guarcini is the Practice Leader of Ballard Spahr's Securities Group. His experience encompasses general corporate and securities law, covering business acquisitions and mergers, private equity, and venture capital transactions. Jerry’s securities work focuses on all types of securities offerings of debt and equity to initial public offerings, tender offers, and private investments in public equity (PIPEs).

Jerry regularly counsels public companies, including their boards of directors and board committees, on securities transactions,...

215-864-8625
Peter Jaslow, Ballard Spahr Law Firm, Corporate and Finance Law Attorney, Philadelphia
Partner

Peter Jaslow is a corporate and transactional attorney who advises publicly- and privately-held companies in corporate and commercial transactions. In particular, Peter represents companies in public and private offerings and other capital-raising transactions, merger and acquisition transactions, and a variety of commercial technology and financial services transactions. He also counsels clients regarding securities matters, including corporate governance, disclosure, and compliance matters.

Peter focuses his practice on life science,...

215-864-8737
Joanna Jiang, Ballard Spahr Law Firm, Corporate and Finance Law Attorney, Washington DC
Associate

Joanna (Ying) Jiang works with investment companies and advisers, trust fund managers, brokers, hedge funds, and private equity funds in a variety of investment management matters. Joanna regularly advises clients on federal regulatory and compliance matters (in particular, the Investment Company Act of 1940 and the Investment Advisers Act of 1940), fund formation and operation, a full range of mutual fund distribution arrangements, mergers and acquisitions, and all issues associated with the organization and operation of investment advisers, including entity...

202-661-7644
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