The amended Regulation A became effective on June 19, 2015, and the SEC has recently provided helpful guidance about it. On June 18, 2015, the SEC made available “Amendments to Regulation A: A Small Entity Compliance Guide” summarizing provisions of the new Regulation A, and on June 23, 2015, the SEC issued new Compliance and Disclosure Interpretations (C&DIs) clarifying certain provisions of the new Regulation A.
The new Regulation A mandated by the JOBS Act is often dubbed as Regulation A+, as a sign of significant improvement over the old Regulation A, which was rarely used as a capital-raising vehicle. The new Regulation A+ provides for two tiers of offerings:
- Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and
- Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer.
Under Regulation A+, an entity organized under the laws of the United States or Canada with its principal place of business in the United States or Canada that is not subject to Section 13 or 15(d) of the Securities Exchange Act of 1934 immediately prior to the offering is considered an eligible issuer for the purposes of Regulation A+. The new C&DIs clarify such eligibility requirement and provide that the following companies are eligible to benefit from the provisions of Regulation A+:
- A company with headquarters located in the United States or Canada, but whose business primarily involves managing operations that are located outside such countries; provided its officers, partners, or managers primarily direct, control and coordinate the issuer’s activities from the United States or Canada.
- A company that was previously required to file reports with the SEC under Section 15(d) of the Exchange Act, but that has since suspended its Exchange Act reporting obligation; provided the company has satisfied the statutory provisions for suspension in Section 15(d) of the Exchange Act or the requirements of Exchange Act Rule 12h-3.
- A voluntary filer under the Exchange Act, i.e., a filer that is not obligated to file Exchange Act reports pursuant to either Section 13 or 15(d) of the Exchange Act.
- A private wholly-owned subsidiary of an Exchange Act reporting company parent; provided such reporting company parent is not a guarantor or co-issuer of the securities of the private wholly-owned subsidiary.
Generally, Regulation A+ has been viewed as a vehicle that private companies can use to raise money to expand their business or to buy out a shareholder. In the new C&DIs, the SEC also clarified that Regulation A+ can be relied upon by an issuer for business combination transactions, such as a merger or acquisition. However, the SEC indicated that Regulation A+ would not be available for business acquisition shelf transactions.
Regulation A+ allows issuers to “test-the-waters” by trying to determine whether there is any interest in a contemplated securities offering. Rule 255 of Regulation A+ requires companies to include certain mandatory cautionary statements in such “test-the-waters” communications. The SEC has previously recognized the issuers interest in using social media (for example, Twitter) to communicate with security holders, and the new C&DIs permits an issuer to “test the waters” in a Regulation A+ offering on a platform that limits the number of characters or amount of text that can be included, and thus technically prevents the inclusion in such communication of the Rule 255 information. The SEC has solved this problem by allowing the use of an active hyperlink to satisfy the requirements of Rule 255 in the following circumstances:
- The electronic communication is distributed through a platform that has technological limitations on the number of characters or amount of text that may be included in the communication;
- Including the required statements in their entirety, together with the other information, would cause the communication to exceed the limit on the number of characters or amount of text; and
- The communication contains an active hyperlink to the required statements that otherwise satisfy Rule 255 and, where possible, prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.
However, if an electronic communication is capable of including the entire required statements, along with the other information, without exceeding the applicable limit on number of characters or amount of text, the SEC considers the use of a hyperlink to the required statements to be inappropriate. This approach is consistent with the SEC’s position on other communications with shareholders under the Securities Act and Exchange Act rules.
Under Regulation A+, state securities (Blue Sky) registration requirements are not preempted for Tier 1 offerings, but such preemption exists for primary offerings of securities by the issuer or secondary offerings by selling security-holders in Tier 2 offerings. The new C&DIs make it clear that Blue Sky registration and qualification requirements are not preempted with respect to resales of securities purchased in a Tier 2 offering. Resales of securities purchased in a Tier 2 offering must be registered, or offered or sold pursuant to an exemption from registration, with state securities regulators.