SEC Proposes “Regulation A+” Amendments

The SEC has proposed regulations to amend Regulation A as required by the Jumpstart Our Business Startups Act (JOBS Act).   Title IV of the JOBS Act directed the SEC to write regulations providing for an exemption from Securities Act registration for public offerings of up to an aggregate of $50 million of equity, debt or convertible debt securities in a 12 month period.  This provision has been termed “Regulation A+” by some observers because it is designed to be an improvement upon the SEC’s Regulation A, which permits exempt public offerings of up to $5 million by non-SEC reporting companies.  Regulation A has been little used because, for one thing, the $5 million limit is too low. 

The SEC’s proposed rules would update and expand the Regulation A exemption by creating two tiers of Regulation A offerings:

  • Tier 1, which would consist of those offerings already covered by Regulation A – that is securities offerings of up to $5 million in a 12-month period, including up to $1.5 million for the account of selling security-holders.
  • Tier 2, which would consist of securities offerings of up to $50 million in a 12-month period, including up to $15 million for the account of selling security-holders.

For offerings up to $5 million, the company could elect whether to proceed under Tier 1 or 2.

Basic Requirements

Under Tier 1 and Tier 2, companies would be subject to basic requirements, including ones addressing issuer eligibility and disclosure that are drawn from the existing provisions of Regulation A.  The proposed rules also would update Regulation A to, among other things:

  • Require issuers to electronically file offering statements with the SEC.
  • Provide that an offering statement and any amendment can be qualified only by order of the SEC.
  • Permit companies to submit draft offering statements for nonpublic SEC review prior to filing.
  • Permit the use of “testing the waters” solicitation materials both before and after filing of the offering statement.
  • Modernize the qualification, communications, and offering process in Regulation A to reflect analogous provisions of the Securities Act registration process, including permitting issuers to satisfy their delivery requirements as to the final offering circular under an “access equals delivery” model when the final offering circular is filed and available on EDGAR.

 Additional Tier 2 Requirements

In addition to the basic requirements, companies conducting Tier 2 offerings would be subject to the following additional requirements:

  • Investors would be limited to purchasing no more than 10 percent of the greater of the investor’s annual income or net worth.
  • The financial statements included in the offering circular would be required to be audited.
  • The company would be required to file annual and semiannual ongoing reports and current event updates that are similar to the requirements for public company reporting.

Eligibility

Regulation A would be available to companies organized in and with their principal place of business in the United States or Canada, as is currently the case under Regulation A.

The exemption would not be available to companies that:

  • Are already SEC reporting companies and certain investment companies.
  • Have no specific business plan or purpose or have indicated their business plan is to engage in a merger or acquisition with an unidentified company.
  • Are seeking to offer and sell asset-backed securities or fractional undivided interests in oil, gas, or other mineral rights.
  • Have not filed the ongoing reports required by the proposed rules during the preceding two years.
  • Are or have been subject to a SEC order revoking the company’s registration under the Exchange Act during the preceding five years.
  • Are disqualified under the proposed “bad actor” disqualification rules.

Preemption of Blue Sky Law

In view of the range of investor protections provided under the proposal, state securities law requirements would be preempted for Tier 2 offerings. 

The SEC will seek public comment on the proposed rules for 60 days.  Let’s see whether the commenters give the proposed rules an “A+”?