On December 19, 2018, the SEC adopted final rules allowing reporting companies to rely on the Regulation A exemption.

How did we get here?

The SEC adopted a new – and greatly improved – Regulation A, known as Reg A+, in 2015.  As noted in previous posts (see here and here) Reg A, provides an exemption from registration under the Securities Act for smaller public offerings, but for many years was seldom used due to cost restraints and small financing caps.  The 2015 amendments, adopted in response to the JOBS Act, remedied these shortcomings, updating Reg A to make it a more viable capital-raising tool.

The main benefits of Reg A+ include the following:

  • Companies can raise up to $50 million every 12 months via two overlapping tiers.
    • Tier 1: offerings of up to $20 million in a 12-month period.
    • Tier 2: offerings of up to $50 million in a 12-month period.
  • Insiders can sell their shares in a Reg A+ offering.
  • Investors in a Reg A+ offering have immediate liquidity – they can sell their shares once the offering is completed and don’t have to hold them for a period of time.
  • Some Reg A+ offerings are exempt from state securities or “blue sky” laws.
  • Some Reg A+ offerings are easier to list on an exchange.
  • Reg A+ can be used for merger and acquisition transactions.

What’s new?

Reporting companies can now share in the fun!  Until now, reporting companies (companies that file periodic reports under Section 13 or 15(d) of the Exchange Act) were not able to take advantage of Reg A+.  However, the 2017 Economic Growth Act, enabled the SEC to eliminate  the prohibition against reporting companies using Reg A+.

Under the new rules, reporting companies will, at a minimum, have to file financial statements for the two previous fiscal years (or such shorter time that they have been in existence) for both Tier 1 and Tier 2 offerings and will be required to filed post-offering periodic reports under Reg A+.  However, for Tier 2 issuers that are reporting companies, the duty to file post-offering periodic reports under Reg A+ will be satisfied if the company files all reports required under the Exchange Act.

The rules also provide that securities issued in a Tier 2 Reg A+ offering may be excluded from the “held of record” count under Section 12(g) of the Exchange Act.  Reporting companies may find this attractive, as a lower shareholder record count equates to easier deregistration or suspension of Exchange Act reporting.

How does this help me?

We anticipate several opportunities following the changes to Reg A+:

  • More ease and less cost for reporting companies looking to raise capital (within the $50 million cap).
    • Particularly important for companies offering non-exchange-listed securities, as Tier 2 offerings are exempt from state “blue sky” requirements.
    • However, Reg A+ does not allow for at-the-market offerings.
  • New option for reporting companies to gauge investor interest before qualifying any offering statements (“test-the-waters” communication rules under Reg A+).
  • New opportunity for follow-on Reg A+ offerings for prior Reg A+ issuers that have since become reporting companies or for reporting companies not eligible for S-3 shelf offerings.
  • Flexible funding strategy for reporting companies to alternate between Reg A+ offerings and registered offerings based on the Reg A+ safe harbor against integration of Reg A+ offerings with prior offers/sales or subsequent offers/sales of registered securities.
  • Smoother deregistration/suspension of Exchange Act reporting based on the aforementioned “held of record” count exclusion.
  • Avenue for companies subject to “baby shelf” limitations under Form S-3.
  • Alternative to private placements.

While Reg A+ has not been used as much as many anticipated, the flexibility it affords to reporting companies may lead to greater use in raising capital for reporting and non-reporting companies alike.