When we last wrote about Regulation A, the SEC had released its proposed rules amending the securities registration exemption to expand its availability to larger offerings. On March 25, 2015, the SEC adopted its final rules amending Regulation A. The final rules are substantially similar in form to the proposed rules, and the amendments will become effective 60 days after publication in the Federal Register.
As background, Regulation A is a longstanding exemption under the Securities Act of 1933 that, until recently, permitted unregistered public offerings of up to $5mm of securities during any 12-month period. Regulation A was intended to bridge the gap between private placement offerings and registered public offerings, but it failed to gain traction due to the high cost of compliance relative to the amount of capital that could be raised under it. Issuers instead gravitated towards private placements under Rule 506 of Regulation D, which permits an unlimited amount of capital to be raised with relative ease.
In recent years, however, there has been a groundswell to amend Regulation A to raise the dollar threshold and make it a more viable option to issuers looking to conduct a limited public offering. Unlike a private placement offering, securities sold in a Regulation A offering are not considered “restricted securities” under Securities Act Rule 144 and are freely transferrable by non-affiliates of the issuer. The amended Regulation A under the final rules – commonly referred to as “Regulation A+” – is a welcome expansion and modernization of the exemption that abandons the $5mm cap in favor of a two-tiered offering structure:
(1) Tier 1 – offerings of securities of up to $20mm during any 12-month period, with not more than $6mm in offers by selling security-holders that are affiliates of the issuer; and
(2) Tier 2 – offerings of securities of up to $50mm during any 12-month period, with not more than $15mm in offers by selling security-holders that are affiliates of the issuer.
For offerings of up to $20mm, issuers may elect whether to proceed under Tier I or Tier II, subject to eligibility, disclosure and reporting requirements. All Regulation A+ issuers are still required to file an extensive offering statement on Form 1-A, which is subject to SEC staff review and comment.
Issuers conducting Tier II offerings are subject to additional requirements, including:
(1) Providing audited financial statements;
(2) Filing annual, semiannual and current event reports; and
(3) A cap on the amount of securities non-accredited investors may purchase (no more than 10% of the greater of the investor’s annual income or net worth)
In contrast to Rule 506 offerings, issuers utilizing Regulation A+ may sell securities to an unlimited number of non-accredited investors. Notably, the final rules also preempt state securities law registration and qualification requirements (i.e. “Blue Sky” laws) for securities offered to “qualified purchasers,” which effectively covers all offerees in Tier 2 offerings but does not cover offerees in Tier 1 offerings. As such, Tier 1 offerings will be subject to both Regulation A and state registration and qualification requirements. Some states have pushed back against the Tier 2 preemption, with Montana and Massachusetts both going so far as filing petitions in federal court challenging the SEC’s authority to preempt state law.
Regardless of how the court challenges play out, it will be interesting to see whether Regulation A+ catches on with smaller companies in need of outside capital. We expect most issuers will continue to rely predominantly on Rule 506 under Regulation D for outside capital, but that Regulation A+ may gain traction among issuers looking to gradually transition to a registered public offering.
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