The Jumpstart Our Business Startups (JOBS) Act was enacted on April 5, 2012 with much fanfare and high expectations. The JOBS Act was designed, in part, to help “Emerging Growth Companies” (annual revenues less than $1 billion) gain greater access to growth capital while reducing regulatory restrictions, compliance requirements, and costs. The JOBS Act was welcomed by a business community which was just emerging from a brutal recession and starved for growth capital. The general reaction to the JOBS Act has been disappointment and a feeling that the JOBS Act has failed to live up to its advance billing. With the proposed Regulation A+ still to come, however, the JOBS Act may at last provide some real financing opportunities for private companies seeking growth capital. For background on the JOBS Act see our Emerging Growth Companies Task Force page.
There is no doubt that some good things have come out of the JOBS Act as its various rules have become effective. The elimination of the ban on general solicitation and advertising for some private offerings may prove very helpful to companies trying to find potential investors. The confidential filing of initial public offering documents (which allows a company to file IPO documents and work with the SEC on a confidential basis to resolve problems before the documents become public) has been extremely popular. The maximum number of shareholders that a private company can have before it must register and report as a public company has increased. This allows large private companies to stay private longer, avoiding the dilemma that Facebook and other companies faced. Finally, issuers of securities are now allowed to “test the waters” in some circumstances to determine potential investor interest in an offering before undertaking it. All of these are positive items, but they have not caused a significant increase in successful financing activity.
So what is Regulation A+ and why do we care? This proposed Regulation is one of the last major rulemaking proposals available under the JOBS Act. The SEC voted on December 18, 2013 to propose new rules under the existing Regulation A that would substantially increase the potential for substantial financing transactions conducted under Regulation A. While we haven’t seen the final rules and likely won’t see them for some time, these proposals have been much anticipated in the corporate finance community because of the potential to revitalize the small (less than $50 million) IPO market, which has been in a sustained decline. While an offering under Regulation A+ as proposed would not be a full public offering, it should provide many of the benefits of a public offering and should require a lesser degree of regulatory and compliance requirements and lower costs. The hope here is that this process will provide a viable and cost effective capital raising alternative for companies that did not want to (or could not) go through the full IPO process. This anticipation led to this exemption being termed “Regulation A+” in the financial press.
While we have not yet seen the final Regulation A+ rules, I believe that this exemption may become a viable process for smaller public financing transactions. Reaction in the corporate finance community has generally been cautiously optimistic, with most commentators and companies taking a “wait and see” attitude. There are clearly some good ideas here but most people want to reserve judgment until the final rules come out. The problem here is that the SEC is still far behind in its rulemaking and it will take some time before the final Regulation A+ rules are finalized and available. The SEC has not yet given any proposed date for these final rules.
Regulation A has been available to issuers for a long time, but it has been largely ignored due to its small ($5 million) offering size limit and the need to comply with state securities laws. Regulation A was originally designed to be a scaled down version of an IPO for smaller companies. From 2009 through 2012, only 19 Regulation A offerings were completed with combined proceeds of $73 million. Since only $5 million can be raised under the current Regulation A limits, most issuers felt that this was insufficient to justify the significant legal, accounting, printing, and other costs that are required along with the costs and other problems associated with state securities law compliance. Private offerings under Regulation D (especially Rule 506) have generally been the preferred method of raising capital for smaller companies.
The components of Regulation A+ as proposed could be much more beneficial for smaller companies. As currently proposed, the Regulation A+ requirements would be:
- Two tiers for offerings:
- Tier 1: Offerings up to $5 million in a twelve month period (similar to the existing Regulation A with some modernization) (including sales of up to $1.5 million by selling shareholders)
- Tier 2: Offerings up to $50 million in a twelve month period (including sales of up to $15 million by selling shareholders)Tier 2 offerings may be very helpful to companies as a capital raising method.
- Offering circular (disclosure document) will be required, and SEC review and comments will be required (similar to IPO process but not as extensive)
- Confidential filing and SEC review of offering circular will be allowed (similar to IPO process)
- Audited financial statements will be required
- Periodic and event-based reports must be filed with the SEC, although an issuer can exit this system after completing reporting for a full fiscal year if fewer than 300 shareholders hold the class of shares that were registered
- General solicitation will be allowed
- Securities are not restricted and may be resold (a significant advantage)
- “Testing the waters” will be allowed (similar to IPO process)
- These offerings will be exempt from state securities regulatory review and compliance (a significant advantage)
SEC commissioner Piwowar even proposed a third Tier for Regulation A+ offerings in his remarks from the December 18, 2013 SEC open meeting . This would cover Regulation A offerings from $10 to $15 million and which would require even less extensive continuing disclosure requirements. This is preliminary and subject to public comment, but it may appear in the final rules.
We still need to see the final Regulation A+ rules before making any definitive judgments, but I believe that Regulation A+ may be the best and most useful item to come out of the JOBS Act if companies perceive that it is a useful and cost-efficient capital raising process. My home market (Florida) is loaded with medium- to large-sized private companies for which Tier 2 offerings under Regulation A+ may be very useful. If Regulation A+ turns out to be a viable option it could stimulate substantial growth for these companies. This success could validate the JOBS Act and its anticipated benefits.