On March 25, 2015, the U.S. Securities & Exchange Commission (SEC) adopted final rules to amend Regulation A intended to modernize the current framework by increasing the access to capital for smaller companies. The final rules implement Title IV of the JOBS Act.
The existing Regulation A framework permitted issuers to offer and sell up to $5 million of securities in any 12-month period. Due to the regulatory burden and exceedingly high costs associated with registering this type of offering with both the SEC and state securities regulators, Regulation A has gone virtually unused by issuers for decades. The final rules, often referred to as “Regulation A+”, expand Regulation A into two tiers.
Tier 1 Offerings
Tier 1 provides an exemption for offerings of up to $20 million in any 12-month period, including no more than $6 million in securities sold on behalf of selling shareholders who are affiliates of the issuer. Tier 1 offerings will continue to be subject to state regulation, but issuers can avail themselves of the North American Securities Administrators Association’s (NASAA) coordinated review program.
Tier 2 Offerings
Tier 2 provides an exemption for offerings of up to $50 million in any 12-month period, including no more than $15 million in securities sold on behalf of selling shareholders who are affiliates of the issuer. The final rules also limit sales by all selling securities holders in an issuer’s initial Regulation A offering and any subsequently qualified Regulation A offering within the first 12-month period to no more than 30% of the aggregate offering price.
Unlike Tier 1 offerings, the rules governing Tier 2 offerings will preempt state registration and qualification laws. Instead, Tier 2 issuers will be required to file offering documents with the SEC at least 21 calendar days before any sales are made.
In a Tier 2 offering, issuers may offer to non-accredited investors no more than 10% of: (i) for natural persons, the greater of such investor’s annual income or net worth, or (ii) for non-natural persons, the greater of such investor’s annual revenue or net assets at fiscal year end. Note, however, this limit does not apply to purchases of securities that will be listed on a national securities exchange upon qualification. A process the SEC substantially streamlined by permitting Tier 2 issuers to use the Form 8-A short form registration statement to register a class of securities for trading under the Securities Exchange Act of 1934 concurrently with the qualification of a Regulation A offering statement.
Information Delivery Requirements
The final rules provide for scaled initial disclosure requirements for Tier 1 issuers, consistent with the prior Regulation A framework.
However, Tier 2 issuers will be required to file audited financial statements with the offering circular. Such issuers must also file annual and semi-annual reports and current event updates that will be appropriately scaled for Regulation A offerings.
Testing the Waters
While issuers were previously prohibited from using “testing the waters” materials, or advertising materials, once the offering statement was filed, the final rules now allow issuers to use such materials both before and after the filing of the offering statement.
The securities that may be offered under Regulation A are limited to equity securities, debt securities and debt securities convertible into or exchangeable into equity interests, including any guarantees of such securities.
Certain issuers, such as reporting companies, investment companies and so-called “bad boy” issuers, that are currently unable to rely on Regulation A, continue to be ineligible under the new rules.
Without extending preemption to Tier 1 offerings, it doesn’t appear the SEC reduced the regulatory burden enough to make Tier 1 a viable capital source for small businesses. However, by including preemption from state securities law regulation in Tier 2, the SEC may have done a better job of balancing the regulatory burden with the ability to access capital. Small businesses looking to raise between $20 and $50 million now have a viable option to consider — the opportunity to access greater amounts of capital without the burden of review by state securities regulators or the full reporting obligations of public companies.