One of the most anticipated items from the JOBS Act enacted in April 2012 was the so-called Regulation A+ – a new and improved exemption that would allow issuers to raise up to $50 million in a 12-month period through a “mini-registration” process that is similar to that of rarely used Regulation A exemption. On December 18, 2013, the SEC issued its proposed rules which were mandated under Title IV of the JOBS Act.
The proposed rules would amend the current Regulation A to create two tiers of exempt offerings. Tier I would become the current Regulation A exemption, which maintains the $5 million offering limitation. Tier II would implement Regulation A+ and would permit offerings of up $50 million in any 12-month period.
Since its implementation years ago, Regulation A has not received widespread use, primarily because it did not provide for preemption of state securities laws and also had a relatively modest dollar limitation on the amount that could be raised. However, Regulation A+ (i.e., Tier II) promises to be a significant improvement over the old Regulation A because of the increased dollar limitation and the other benefits, including the potential preemption of state securities laws and regulations in certain circumstances.
All 387 pages of the proposed rules can be read on the SEC’s website, but a summary of these proposed rules are provided below for those not inclined read the entire release.
As proposed, Regulation A+ would be available only to United States and Canadian companies that have their principal place of business in the U.S. or Canada. Like the current Regulation A exemption, the Regulation A+ would not be available to certain types of issuers, such as companies that are already SEC reporting companies, registered investment companies and “blank-check companies.” However, under the currently proposed rules, shell companies may avail themselves of the Regulation A+ exemption so long as they are not blank-check companies.
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, but would exclude asset-backed securities.
As proposed, investors in a Tier II offering may acquire no more than 10% of the greater of (i) the investor’s annual income or (ii) their net worth. However, unlike the new Rule 506(c), the proposed rules do not impose an obligation on the issuer to take reasonable steps to verify investor income or net worth. Companies must only advise investors of the applicable investment limitations and can rely on investor certifications unless the issuer has knowledge that the representations are false.
Form 1-A (the “Mini-Registration Statement”)
Regulation A+ offerings will be made via a scaled registration statement called an offering statement on Form 1-A, which will be filed with the SEC via EDGAR. These forms will be subject to SEC review and comment and will be required to be completed prior to qualification of the offering.
Form 1-A is proposed to consist of a form requiring basic information about the issuer and the offering, an offering circular with financial statements and exhibits. The offering circular will include a narrative disclosure about the issuer and its business which will be similar to the smaller reporting company disclosure requirements in a registered offering but not as extensive. The proposed Form 1-A differs slightly than the current Form 1-A in that it would not allow issuers to the question and answer disclosure format (Model A). Alternatively, the proposed rules provide an issuer with the option to instead use an offering circular that meets the requirements of Part I of Form S-1.
As proposed, in a Tier II offering, issuers must file balance sheets as of the two most recent fiscal years, in addition to the other financial statements required for Tier I offerings, which are identical to those financial statements currently required for a Regulation A Offering. In addition, all annual financial statements must be audited in a Tier II offering.
Periodic Reporting Requirements
Issuers relying on the Tier II exemption will be subject to certain periodic reporting requirements including the obligation to file annual reports on a new Form 1-K, semiannual reports on a new Form 1-SA, and current reports on a new Form 1-U. These reports are effectively simplified versions of Form 10-K, Form 10-Q and Form 8-K filed by reporting companies, and are based on the informational requirements of Form 1-A. However, the proposed rules permit issuers to suspend their reporting requirements if at any time there are fewer than 300 holders of record of the securities issued in a qualified Tier II offering.
The proposed rules include provisions designed to facilitate the development of secondary trading markets for securities issued in connection with Tier II offerings. Securities sold in a Regulation A offering (either Tier I or Tier II) are not considered “restricted securities” under the Securities Act and may be resold without restriction.
Also, as proposed, brokers will be permitted to rely upon information contained in reports filed by Regulation A issuers to satisfy the broker’s obligations under Exchange Act Rule 15c2-11 to review information about an issuer in connection with establishing quotations on any facility other than a national securities exchange. However, the proposed rules do not address any measures that would facilitate the listing of securities offered on a national exchange. An issuer would still be required to file a Form 10 registration statement to do so. As a result, the secondary market for securities issued under the new Regulation A+ exemption may only provide marginally better liquidity for investors.
Because Regulation A+ offerings are not registered offerings, issuers are not subject to liability under Section 11 of the Securities Act. However, like the current Regulation A exemption, offerings under the proposed rules will be subject to the liability provisions of Section 12(a)(2) of the Securities Act, which prohibits an offer or sale of a security by means of an offering circular or oral communication that includes a material misleading statement or material misstatement of fact, as well as the anti-fraud provisions of both the Securities Act and the Exchange Act (e.g., Section 10(b) and Rule 10b-5).
State Law Preemption
One of the significant improvements with Regulation A+ is the potential ability to preempt state securities laws. Under the proposed rules, Tier I offerings will continue to be subject to state securities law requirements. However, as proposed, Tier II offerings will preempt state securities laws if made to “qualified purchasers.” This term is currently defined in the proposed rules as all offerees in a Regulation A offering and all purchasers in a Tier II offering. The ability of issuers to preempt state law requirements is one of the most significant improvements of Regulation A+ over the current Regulation A.
Testing the Waters
The ability to “test the waters” (i.e., allowing issuers to gauge the interest of potential investors in a proposed offering) in connection with a Regulation A offering coupled with the increased dollar limitations may make Regulation A+ offerings more desirable than a Regulation D offering to certain issuers, even with the relaxation of the prohibition on general solicitation for certain offerings made pursuant to Regulation 506. However, like the current Regulation A exemption, solicitation materials must be filed with the SEC.
I believe that the new Regulation A+, once implemented by the SEC, has the potential to be a viable alternative for smaller companies looking to raise up to $50 million in capital. As I mentioned above, there are a number of potential advantages that Regulation A+ has over the existing Regulation D exemptions. The new exemption has the potential to significantly increase access to sources of capital without imposing the extensive regulatory compliance burdens that would be required in a registered offering. At the same, the continued reporting requirements could promote the development of secondary trading markets for these securities but would also impose additional costs that issuers must account for. Ultimately, whether a Regulation A+ offering makes sense will be a case-by-case determination, but it is nice to have finally have a legitimate option outside of Regulation D.