CLIENT ALERT: SEC Adopts Regulation A+ to Exempt Offerings of up to $50 Million of Securities Annually in Groundbreaking Step
In an effort to facilitate smaller companies’ access to capital, the Securities and Exchange Commission adopted final rules on March 25, 2015 to amend and expand the exemption for public offerings afforded by Regulation A (Rules 251 to 263 under the Securities Act of 1933) to include offerings of up to $50,000,000 of securities annually, commonly referred to as “Regulation A+,” effective 60 days after the final rules are published in the Federal Register (estimated to be in mid-June 2015). The new rules (issued in Release Nos. 33-9741 and 34-74578) are one of the final mandates under the Jumpstart Our Business Startups (JOBS) Act enacted by Congress in April 2012 and follow extensive comments and review by the SEC, state securities regulators, industry task force groups and the public. Adoption of Regulation A+ is a groundbreaking development in the area of securities law.
Offering Tiers and Limits
The final Regulation A+ rules establish two alternative tiers of offerings:
- A Tier 1 offering limits an issuer’s offering of securities to $20,000,000 in any 12-month period, including no more than $6,000,000 in sales on behalf of selling shareholders that are affiliates of the issuer; and
- A Tier 2 offering limits an issuer’s offering of securities to $50,000,000 in any 12-month period, including no more than $15,000,000 on behalf of selling shareholders that are affiliates of the issuer.
Sales by selling shareholders in the issuer’s initial Regulation A+ offering and in any subsequent Regulation A+ offering during the following 12 months are limited to 30% of the aggregate offering price.
Regulation A+ is in addition to the existing Regulation A for offerings not exceeding $5,000,000 in any 12-month period.
Based on public comments leading up the final rules, it appears the concept of tier levels was created, in part, so that only larger Tier 2 Regulation A+ offerings, with their built-in investor protections, would be preempted from state securities (or “blue sky”) review.
Issuer Eligibility Requirements
SEC reporting companies are not eligible to use Regulation A+. All other types of companies may use Regulation A+, except development stage companies without a specified business, and business development companies and other investment companies registered or required to be registered under the Investment Company Act of 1940. Like existing Regulation A, an issuer seeking eligibility is also required to determine whether the issuer or any of its covered persons has had a disqualifying event, such as being classified as a “bad actor” under Rule 262 of Regulation A. Regulation A+ additionally excludes issuers that are, or have been, subject to any order pursuant to Section 12(j) of the Securities Exchange Act of 1934 (“Exchange Act”) involuntarily de-registering the issuer within the past five years, and issuers that are required to, but have not, filed the ongoing reports required by the Regulation A+ rules during the past two years.
Investor Purchase Limits
An investor who is not an “accredited investor” under Rule 501(a) of Regulation D under the Securities Act of 1933 (the “Securities Act”) is limited in his, her or its purchase in a Tier 2 offering to no more than:
- for individuals – 10% of the greater of the investor’s annual income or net worth; and
- for entities – 10% of the greater of the investor’s annual revenue or net assets at fiscal year end.
If the issuer’s securities are to be listed on Nasdaq, the NYSE or another national securities exchange, the purchase limits above are not applicable.
An eligible Regulation A+ offering can include substantially all equity securities, including common stock, preferred stock, convertible preferred stock, debt securities, warrants, options and other rights to acquire such equity or debt securities, but excludes asset-backed securities.
Just as in registered offerings, Regulation A+ securities can be offered publicly using general solicitation and advertising, and investors do not receive “restricted securities.”
Regulation A+ allows issuers to “test the waters” (i.e., to publish or deliver a written document to prospective investors or make scripted radio or television broadcast to determine whether there is an interest in their proposed securities offering before they incur the full range of legal, accounting and other costs associated with filing an offering statement with the SEC) with, or solicit interest in a potential offering from, the general public either before or after the filing of the offering statement (see “Offering Statements” below). However, any solicitation materials used after publicly filing the offering statement must be preceded or accompanied by a “preliminary offering circular” (similar to a “red herring” prospectus) or contain a notice informing potential investors where and how the most current offering circular can be obtained.
Qualification, Communications and Offering Process
Issuers and financial intermediaries in the prequalification period are required to deliver a preliminary offering circular to prospective investors at least 48 hours in advance of the sale, unless the issuer is subject to, and current in, its Tier 2 ongoing reporting obligations. Issuers and financial intermediaries would only be required to comply with the general delivery requirements for offerings if the issuer is otherwise subject to, and current in, its Tier 2 ongoing reporting obligation.
Regulation A+ offerings will share many characteristics with registered offerings. For example, issuers and financial intermediaries in Regulation A+ offerings may satisfy their delivery requirements for the final offering circular under an “access equals delivery” model when sales are made on the basis of offers conducted during the prequalification period and the final offering circular is filed and available on the SEC’s EDGAR website.
Issuers and financial intermediaries are also required, not later than two days after completion of a sale, to provide investors with a copy of the final offering circular, or a notice with a website where it may be obtained on EDGAR and contact information to notify an investor where a request for a final offering circular can be sent and received in response.
In addition, after qualification of the offering statement, issuers are permitted to file offering circular updates and supplements in lieu of post-qualification amendments in specified circumstances (such as for the types of information that may be excluded from a prospectus under Rule 430A under Securities Act).
Regulation A+ offerings can be on a continuous or delayed basis over time, but issuers in a continuous or delayed Tier 2 offering must be current in their annual and semiannual reporting obligations. Finally, issuers are permitted to qualify additional securities in a Regulation A+ offering by filing a post-qualification amendment to an offering statement.
Content and Filing Requirements for Offering Statements
An issuer in a Regulation A+ offering must file an offering statement with the SEC electronically on EDGAR. The SEC staff will review this offering statement. Like an emerging growth company attempting its initial public offering, an issuer may also choose to make a non-public submission of the offering statement and amendments for SEC review before formally filing such documents, as long as all such documents are publicly filed not later than 21 calendar days before qualification.
The form to be used for a Regulation A+ offering is a Form 1-A. Under Part I of the form, an issuer must provide, among other notifications, general information about the issuer, the basis for eligibility, the offering and the securities to be offered, and the jurisdictions in which the securities will be offered. Part II of the form – the offering circular – essentially calls for narrative disclosure closely following the outline of Part I of a Form S-1 registration statement or a prospectus (or, in other words, the public offering prospectus).
Regulation A+ offering statements must be “qualified” by the SEC (akin to a registration statement being declared “effective”), before sales may be made.
The offering circular requires Tier 1 and Tier 2 issuers to file balance sheets and related financial statements for the two previous fiscal years, or for such shorter time that they have been in operation. Tier 2 issuers must include financial statements in their offering circulars that are audited in accordance with either the auditing standards of the AICPA or the PCAOB. Financial statements for a Tier 1 issuer do not need to be audited. Financial statements must be dated not more than nine months before filing or qualification, with the most recent annual or interim balance sheet not older than nine months. If interim financial statements are required, they must cover a period of at least six months.
Ongoing Reporting Obligations for Issuers
Within 30 calendar days after the completion or termination of an offering, Tier 1 issuers must provide information about the actual sales in the offering and update certain issuer information by filing on EDGAR a Form 1-Z exit report with the SEC.
Tier 2 issuers must file on EDGAR annual and semiannual reports, as well as current event reports. They must also file a special financial report to cover fiscal periods between the most recent period included in the offering statement and the issuer’s first required periodic report.
A Tier 2 issuer’s reporting obligations under Regulation A+ would be suspended when:
- they otherwise become subject to the reporting requirements for public companies under Section 13 of the Exchange Act; or
- they file a Form 1-Z exit report after completing reporting for the fiscal year in which an offering statement was qualified (as long as the securities to which the offering statement relates are held of record by fewer than 300 persons and offers or sales are not then ongoing under the qualified offering statement).
In a Tier 2 issuer’s first annual report after completion or termination of its Regulation A+ offering, the issuer must include information about actual sales in the offering and update certain issuer information.
Except as noted above, issuers do not incur either Exchange Act reporting obligations after the Regulation A+ offering or Sarbanes-Oxley Act obligations applicable only to SEC reporting companies.
Exchange Act Registration
Having completed a Regulation A+ offering of exempt securities, a Tier 2 issuer will not be subject to the mandatory registration requirements of Section 12(g) of the Securities Act for as long as:
- it engages the services of a transfer agent that is registered with the SEC;
- it remains subject to its Tier 2 reporting obligation;
- it is current in its annual and semiannual reporting at fiscal year end; and
- it had a public float of less than $75,000,000 as of the last business day of its most recently completed semiannual period (or, in the absence of a public float, had annual revenues of less than $50,000,000 as of its most recently completed fiscal year).
The new rules also permit issuers to use a Form 8-A short-form registration statement under the Exchange Act concurrently with the qualification of a Regulation A+ offering statement that includes Part I of Form S-1 narrative disclosure in order to register securities under Section 12(b) or 12(g) of the Securities Act.
State Securities Laws
In light of the total package of investor protections described above, the SEC’s final rules provide for the preemption of state securities (or “blue sky”) law registration and qualification requirements for securities offered or sold to “qualified purchasers.” A qualified purchaser is defined as any person to whom securities are offered or sold in a Tier 2 offering.
Tier 1 offerings will be subject to state registration and qualification requirements, and issuers may utilize the coordinated review program developed by NASAA (North American Securities Administrators Association).
Importantly, nothing in the final rules limits the ability of state securities regulators to investigate and bring anti-fraud enforcement actions involving Regulation A+.
Development of Venture Exchanges
In a related comment discussed in the SEC’s release, the SEC stated that it is considering ways to facilitate secondary market trading in the securities of Regulation A+ issuers, such as by encouraging the development of “venture exchanges” or other trading venues that are focused on attracting such issuers. It is believed that the development of venture exchanges for Regulation A+ issuances would greatly enhance liquidity in these securities, thereby facilitating greater demand and higher prices for the initial issuances of these securities.
This Client Alert provides a brief overview of the final Regulation A+ rules adopted by the SEC. The SEC’s adopting release, however, is extensive and provides specific disclosure formats and new forms to comply with Regulation A+ and, accordingly, should be reviewed carefully in its entirety before commencing an offering. For further clarity on the final rules, the SEC’s staff will be shortly preparing the required Small Business Compliance Guide in Plain English and posting it on the SEC’s website.
For more information about using Regulation A+, please feel free to contact the Olshan attorney with whom you regularly work or Spencer Feldman of this firm to discuss any of these matters.