Are you a US private company looking for capital? Regulation A+ may be your answer.

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.

SEC Issues Additional Transitional Guidance Related to Rule 506 Offerings

Today, the SEC issued new  Compliance and Disclosure Interpretations (C&DIs) related to Rule 506 offerings commenced prior to September 23, 2013, the effective date of the new Rule 506(c) exemption.   

Effective September 23, 2013, a company conducting a private placement under Rule 506 of Regulation D has had a choice of either using Rule 506(b) for a private placement subject to the prohibition against general solicitation or using new Rule 506(c) for a private placement in which securities can be offered through general solicitation provided that all purchasers are accredited investors and the company takes reasonable steps to verify that all purchasers are accredited investors (see our prior blog post for additional information about Rule 506(c)).

The new rule Rule 506(c) exemption was set forth in Securities Act Release No. 9415.  In such release, the SEC explained that for an ongoing offering under Rule 506 that commenced before the effective date of Rule 506(c), an issuer may choose to continue such offering after the effective date in accordance with the requirements of either Rule 506(b) or Rule 506(c). If an issuer chooses to continue the offering in accordance with the requirements of Rule 506(c), any general solicitation that occurs after the effective date will not affect the exempt status of offers and sales of securities that occurred prior to the effective date in reliance on Rule 506(b).

The new C&DIs issued today further clarify this transitional guidance.  Please see below a summary of such C&DIs. 

  • If an issuer
    • commenced a Rule 506 offering before September 23, 2013, and
    • decides, at some point after September 23, 2013, to continue that offering as a Rule 506(c) offering under the transition guidance in Securities Act Release No. 9415,

the issuer is not required to take “reasonable steps to verify” the accredited investor status of investors who purchased securities in the offering before the issuer conducted the offering in reliance on Rule 506(c).  The issuer must take reasonable steps to verify the accredited investor status of only those investors who purchase securities in the offering after the issuer begins to make offers and sales in reliance on Rule 506(c).    

  • An issuer that commenced a Rule 506 offering before September 23, 2013 and made sales either before or after that date in reliance on the exemption that, as a result of Securities Act Release No. 9415, became Rule 506(b) may rely on the transition guidance in Securities Act Release No. 9415 that permits switching from Rule 506(b) to Rule 506(c) if it already sold securities to non-accredited investors before relying on the Rule 506(c) exemption as long as all sales of securities in the offering after the issuer begins to offer and sell in reliance on Rule 506(c) are limited to accredited investors and the issuer takes reasonable steps to verify the accredited investor status of those purchasers. 

SEC Guidance on “Bad Actor” Disqualifications from Rule 506 Offerings

On January 3, 2014, the SEC issued new Compliance and Disclosure Interpretations (C&DIs) clarifying the application of the “bad actor” disqualifications from Rule 506 offerings.  Generally, under the new Rule 506(d), an issuer may not rely on the Rule 506 registration exemption if the issuer or any other person covered by Rule 506(d) is subject to a bad actor triggering event at the time of each sale of securities.  Most of the new C&DIs focused on one category of such covered persons – a beneficial owner of 20% or more of the issuer’s outstanding voting equity securities.  Please see below a summary of such C&DIs.

  • A shareholder that becomes a 20% beneficial owner upon completion of a sale of securities is NOT a 20% beneficial owner at the time of such sale.  However, it would be a covered person with respect to any sales of securities in the offering that were made while it was a 20% beneficial owner.  
  • The term “beneficial owner” under Rule 506(d) means any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares, or is deemed to have or share:  (1) voting power, which includes the power to vote, or to direct the voting of, such security; and/or (2) investment power, which includes the power to dispose, or to direct the disposition of, such security. 
  • For purposes of determining 20% beneficial owners under Rule 506(d), it is necessary to “look through” entities to their controlling persons because beneficial ownership includes both direct and indirect interests (see Exchange Act Rule 13d-3). 
  • If some of the shareholders have entered into a voting agreement under which each shareholder agrees to vote its shares of voting equity securities in favor of director candidates designated by one or more of the other parties, which effectively means that such shareholders have formed a group, then the group beneficially owns the shares beneficially owned by its members (see Exchange Act Rules 13d-3 and 13d-5(b)).  In addition, the parties to the voting agreement that have or share the power to vote or direct the vote of shares beneficially owned by other parties to the agreement (through, for example, the receipt of an irrevocable proxy or the right to designate director nominees for whom the other parties have agreed to vote) will beneficially own such shares.  Parties that do not have or share the power to vote or direct the vote of other parties’ shares would not beneficially own such shares solely as a result of entering into the voting agreement (see another new C&DI issued by the SEC on January 3, 2014).  If the group is a 20% beneficial owner, then disqualification or disclosure obligations would arise from court orders, injunctions, regulatory orders or other triggering events against the group itself.  If a party to the voting agreement becomes a 20% beneficial owner because shares of other parties are added to its beneficial ownership, disqualification or disclosure obligations would arise from triggering events against that party.