This week, the SEC published a series of new Compliance and Disclosure Interpretations (“CDIs”) related to the newly revised Regulation A, which became effective on June 19, 2015. While many of the new CDIs addressed procedural and interpretational issues under the new rules, there was an important development that could make Regulation A that much more useful for companies.
The positive news comes in the form of the SEC staff’s response to Question 182.07 which asks whether issuers would be able to use Regulation A in connection with merger or acquisition transactions that meet the criteria for Regulation A in lieu of registering the offering on an S-4 registration statement. Based on the SEC’s final adopting release, it did not appear that Regulation A would be available for use in these types of business combination transactions. However, the interpretation published yesterday clarifies that issuers may, in fact, use Regulation A in connection with mergers and acquisitions. The one exception is that Regulation A would not be available for business acquisition shelf transactions that are conducted on a delayed basis.
This is a very positive development for issuers that want to issue equity in connection with acquisitions of other companies, but do not wish to become a public reporting company under the Exchange Act. Previously, these issuers had very few options for actually issuing securities outside of filing a registration statement and subjecting themselves to Exchange Act reporting obligations. This was particularly the case in instances where there were a large number of target company shareholders who were not deemed to be accredited investors and the acquirer could not rely on the private offering exemption.
Based on the new SEC staff interpretations, these issuers may now consider using Regulation A to issue equity in connection with business combination transactions. Although there are certain reporting and other obligations that would be required under Regulation A, they are significantly less burdensome than those that would be required of an Exchange Act reporting company. For that reason, Regulation A offering are sometimes referred to as “mini-IPOs.”
As a result of the new CDIs, one sector that we believe could significantly benefit from the options afforded by Regulation A is the community banking space. Specifically, Regulation A will provide another option to community bank holding companies that are seeking to grow through the acquisition of other banks and bank holding companies. Because these organizations traditionally have larger and more geographically diverse shareholder bases, it is often difficult for them to use their own securities as currency in merger transactions without incurring the significant expense of filing a registration statement. Now, these bank holding company issuers will be able to issue up to $50 million in securities in connection with acquisitions every 12 months using Regulation A.
This is just another positive development in the Regulation A arena that we believe will prove to be significantly beneficial to businesses for both M&A and capital raising purposes.