Regulation A+, one of the most overlooked provisions of the JOBS Act, promises to be the best new way for private companies to raise money without the headaches of going public or the restrictions of private offerings. As part of the JOBS Act, the SEC was tasked with creating a new offering exemption that has been dubbed “Regulation A+” due to its improvement upon the current Regulation A exemption. The upgrades should take little-used Regulation A and transform it into the primary way for private companies to raise capital in the U.S. In fact, I believe that Regulation A+ will end up having the opposite effect of the stated intent of the JOBS Act, which is to have more companies go public. In contrast, Regulation A+ will allow smaller and mid-cap public companies to more easily raise capital without having to going public. As noted in the recent GAO review of current Regulation A, investment banks that had stayed away from Regulation A offerings in the past because of the small offering maximum will now be attracted to the new exemption.
In the past, Regulation A has suffered from some serious limitations. Particularly, the exemption only allows for $5 million to be raised in any 12-month period. This amount is too small for many companies, given the offering costs. In addition, the securities in Regulation A offerings do not qualify as “covered securities” under the National Securities Markets Improvement Act of 1996, which would have exempted them from state securities laws. Thus, a Regulation A offering still has to comply with time consuming and expensive state “Blue Sky” law requirements. Regulation A also requires SEC review of an issuer’s offering materials (generally, a scaled-down version of a full registration statement). This offering statement, which includes a notification and a fairly extensive offering circular and exhibits, still requires a substantial outlay, despite being less expensive than a full registration statement.
So companies ultimately turn to other exemptions to raise capital. The main exemption used is SEC Rule 506, which allows an unlimited amount to be raised, but places limits on solicitation, sales to non-accredited investors and resale (elimination of these solicitation limits are subject to current proposed rules). With the creation of new Regulation A+, however, we should see the SEC throwing out the bad, and keeping the good, parts of Regulation A. As a result, I believe Regulation A+ will overtake Rule 506 as the primary offering exemption.
Subject to SEC rule making, Regulation A+ offerings will have the following conditions:
- The offering limit will be $50 million in any 12-month period (subject to adjustment by the SEC every two years), which is a substantial increase over existing Regulation A;
- Issuers may solicit interest in the offering prior to filing an offering statement with the SEC, which means that issuers will be able to “test the waters”;
- Securities may be offered and sold publicly and will not be “restricted securities”, which means they will be freely tradable;
- Offerings may be of equity, debt, or debt convertible into equity interests, including guarantees;
- Issuers will need to file audited financial statements with the SEC every year, but this requirement is substantially less burdensome than the reporting requirements placed on public companies (although the SEC has the authority to require some form of periodic disclosure); and
- Issuers will be subject to liability under Section 12(a)(2) of the Securities Act of 1933.
In addition to these conditions, Regulation A+ securities may qualify as “covered securities,” and as such, would be exempt from state law registration requirements. This welcomed change will reduce the expense for “Blue Sky” law compliance. The securities will qualify as “covered securities” if they are (i) sold on a national securities exchange, or (ii) sold solely to “qualified purchasers” (a term to be defined by the SEC). With this change, the largest burden for Regulation A offerings will be removed. In fact, by preempting state registration requirements, the testing the waters provisions will become practical (current state laws severely restrict the use of solicitation).
This all sounds very positive for Regulation A+, but the SEC has yet to issue the new rules. Notably, the JOBS Act does not set a deadline for SEC rulemaking, and it is unclear when Regulation A+ will ultimately become effective (although we do note that representatives from the Division of Corporation Finance have recently stated that they are working on proposed rules). Still, when it does arrive, Regulation A+ should be a viable offering exemption that should become one of the most widely used exemptions for raising money in the U.S.