The Securities and Exchange Commission (SEC) anticipates stronger investor protections and more investor choice will result from its adoption of final rules for an updated and expanded Regulation A, as required by Title IV of the Jumpstart Our Business Startups (JOBS) Act.
$50 Million in 12-month Period
Smaller companies will soon be able to publicly sell and offer up to $50 million in securities in a 12-month timeframe, subject to disclosure, eligibility, and reporting requirements of course. The SEC believes this is a “workable path” to easing the process of raising capital that smaller companies may welcome, while still protecting investors.
State Regulators Unhappy
State securities regulators, and NASAA, the association that represents them, claim the rule strips investors of the important protections afforded by state securities regulators under so-called “Blue Sky Laws.” Their criticism springs from the new rule's “pre-emption” provision, which allows offerings to bypass state securities law qualification and review by state regulators. The SEC attempted to address this concern by limiting to pre-emption to “Tier 2” offerings as described below.
Two Tiers of Offerings
Regulation A+, as the new rules are often called, provides for two tiers of offerings:
- Tier 1: securities offerings up to $20 million in a 12-month timeframe, with not more than $6 million worth of offers from affiliates of the issuer that are selling security-holders.
- Tier 2: securities offerings up to $50 million in a 12-month timeframe, with not more than $15 million worth of offers from affiliates of the issuer that are selling security-holders.
Basic requirements for disclosure and issuer eligibility, as exist under the current provisions of Regulation A, apply to both tiers. However, Tier 2 offerings must include audited financial statements, and companies making Tier 2 offerings will have to file semiannual and annual reports with the SEC after the offering. For either tier the company must file an offering circular with the SEC for review and qualification, and companies proceeding under either tier may submit their draft offering circulars for non-public review by SEC staff before filing. Companies may still use solicitation materials after they've filed their electronic offering statement.
Pre-emption of state securities laws is available only for Tier 2 offerings. Companies offering $20 million or less in securities that seek to bypass state Blue Sky Laws may elect to make a Tier 2 offering.
As under the original regulation, an offering under Regulation A+ is considered a “public offering,” which means that securities purchased by non-affiliates will be freely tradable.
A Little Background on Regulation A
When a company sells or offers securities to potential investors, the Securities Act of 1933 requires the offer and sale be registered, or exempted from such registration. Regulation A has, since about 1936, been an exemption allowing up to $5 million in unregistered public offerings in any 12-month period.
While considered an exemption from registration, Regulation A has always had a “qualification” procedure involving submission to the SEC of a prescribed form of offering document, which is very much like the registration process. For that reason it has been thought of as “short form registration.” Because of those requirements as well as the low dollar ceiling and need to conform with state securities laws, Regulation A offerings have been quite rare in recent decades. Exemptions available for private offerings under the Securities Act have had much fewer regulatory requirements.
By greatly increasing the size of offerings permitted, allowing a bypass of state regulations and keeping regulatory requirements less onerous than full registration, the SEC staff believes that the adoption of Regulation A+ is an important step on the road to making it easier for smaller companies to raise capital.
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