In a groundbreaking announcement on March 25, 2015, the Securities and Exchange Commission announced final revisions to Regulation A. Deemed “Regulation A+”, the amended provisions embrace the original intent of the JOBS Act by providing a viable means for small business to raise capital and access the public markets.
The Securities and Exchange Commission (SEC) has finally revised and released “Regulation A+”. It conforms to original intent of the JOBS Act by offering a practical way for small business to raise capital and access the public markets. Get in touch with us to learn more about Regulation A+ and how it applies to your business.
Regulation A – a Historical Perspective
For many years, the reliance by issuers on the exemption from registration provided for by Regulation A in raising capital was relatively limited [1]. Regulation A, as originally structured, provided for offerings not exceeding $5 million in any 12-month period [2]. Although Regulation A offerings are not subject to the SEC traditional review process for registered offerings, these offerings must go through a federal filing and review process.
Regulation A represented an early attempt by the Securities and Exchange Commission (“SEC”) to exercise its authority under section 3(b) of the Securities Act of 1933 (the “Act”) to exempt offerings of securities from registration if it finds that registration “is not necessary in the public interest and for the protection of investors by reason of the small amount involved or the limited character of the public offering….” [3] The advantage of issuers relying on Regulation A was that Regulation A securities can be offered publicly and are freely tradable in the secondary market and can be offered and sold to both accredited and non-accredited investors [4]. Moreover, the scaled down financial disclosure requirements of not requiring audited financial statements made the use of Regulation A attractive to smaller issuers unwilling or otherwise unable to have such audit performed.
Where Regulation A failed many issuers, however, was the treatment of the offering under state “blue sky” laws. The Uniform Securities Acts of 1956 and 2002, respectively, are relied upon by a majority of States in forming a basis for each’s respective blue sky laws. Each State’s blue sky laws provide for a series of exemptions with respect to various types of securities offerings. The two methods in which States have traditionally relied upon in registering securities offerings – registration by qualification or registration by coordination, often spell doom for Regulation A issuers. The National Securities Markets Improvement Act of 1996 sought to unify the patchwork state-level schemes by preempting “covered” securities from state blue sky registration by specifically did not include Regulation A securities in that definition. [5]
Registration by qualification mirrors the process employed by the SEC with respect to the review of registered offerings made under the Act. That is, the issuer submits the offering circular or prospectus and the respective state's securities review board reviews the efficacy of the disclosure in consideration of such state’s blue sky standards. Alternatively, a much preferred method – registration by coordination, is available to issuers that have registered their offering under either the Act or the Securities Exchange Act of 1934 (the “Exchange Act”). Notably, a Regulation A offering is not a “registered” offering but rather provides for an exemption from registration under the Act. Thus, registration by coordination is generally not available to Regulation A issuers.
In addition to the aforementioned, most states also conduct merit reviews of Regulation A offerings. A merit review resembles an SEC review in that the issuer is required to submit the subject offering circular or prospectus. The offering is then reviewed in light of various substantive standards, including, among other factors, the size of the promoter’s equity investment.
In 2014, the North American Securities Administrators Association (“NASAA”) developed a coordinated review program for Regulation A filings. [6] To date, 48 dates have elected to participate in the coordinated review program. Under the program, an Issuer must complete and submit NASAA Form CR-3b together with the completed Form 1-A. The Issuer must elect upon submission which states the Issuer intends to seek qualification of the offering and pay the requisite fee to each such jurisdiction.
The review contemplates a merit based review on NASAA Statements’ of Policy. One lead examiner is selected and provides the issuer with a comment letter not unlike the SEC’s own review of the Form 1-A. While the lone examiner streamlines the process from the perspective of having to deal with a myriad of state securities regulators, each applying a perhaps different standard of review, the cost to qualify the offering in multiple states – a near necessity when perhaps contemplating an offering approaching the $5 million maximum, can become significant.
Thus, to date, issuers have generally opted not to rely on Regulation A given the relative cost outweighing the benefits of what was originally intended to be a streamlined offering process. [7] For a small business with limited capital to seek to register the Regulation A offering in multiple states in many cases may prove to be prohibitively expensive vis-a-vi the alternatives, either an offering made pursuant to the exemption provided for by Regulation D or even an registered offering under the Act. These costs, coupled with the fact that the SEC’s review of a Form 1-A submission can be perhaps as time consuming as a traditional registered offering on Form S-1 has rendered traditional Regulation A offerings somewhat obsolete.
A Redefined Regulation A
On March 25, 2015, the SEC adopted final rules to implement Section 401 of the Jumpstart our Business Act (the “JOBS Act”) [8]. Section 401 of the JOBS Act amended Section 3(b) of the Act by renumbering it as Section 3(b)91) and adopting new sections (b)(2) through (b)(5). The final rules implement the JOBS Act mandate by expanding Regulation A into two tiers; (a) Tier 1 for securities offerings of up to $20 million; and (b) Tier 2 for offerings up to $50 million.
Tier 1, representing the historical Regulation A exemption, poses the same problems for issuers but does provide for the enhanced total offering amount of $20 million versus $5 million. Tier 1 issuers are still subject to both SEC and state blue sky review. Tier 1 issuers must still file Form 1-A, in its now amended form, but such filing can now be made electronically through EDGAR, whereas the previous iteration of Regulation A required a cumbersome, seven (7) hard-copy manual filing with the SEC’s Washington, D.C. headquarters.
The Tier II provisions seemingly manifests the original intent of Regulation A. Offerings made under Tier II are subject to SEC review but notably are preempted from state blue sky review. In preempting blue sky review, issuers are alleviated from the burden of having to qualify individually across the majority of states – again, a perhaps prohibitively costly proposition. Yet, the Tier II offering is not without additional burden. Any issuer qualifying an offering under Tier II will thereafter be required to file periodic and current reports – closely resembling the Exchange Act scheme on newly promulgated forms 1-K (annual), 1-SA (semi-annual) and 1-U (current). Moreover, the final rules provide a means for an issuer in a Tier 2 offering to concurrently list a class of securities on a national exchange through a short-form Form 8-A, without requiring the filing of a separate registration statement on Form 10.
A further consideration for Tier II issuers is the ten (10%) percent purchase limitation in any given offering. That is, any non-accredited investor, as traditionally defined in Rule 501 of Regulation D, may not purchase more than ten (10%) percent of the total Tier II offering. Any issuer must provide notice of such limitation in its offering circular.
Finally, a Tier II issuer’s periodic reports will satisfy Exchange Act Rule 15c2-11 broker-dealer requirements relating to the publishing of a quotation on a national securities exchange. Thus, for a private issuer, the Tier II offering provides a streamlined means with which to list its securities on a major national exchange. It is unclear, yet perhaps logical, that the periodic report provided for under Tier II would likewise qualify as “current public information” as defined by Rule 144(c) promulgated under the Act.
Conclusion
The original Regulation A, becoming a relic of times past when intra-state offerings and small regional stock exchanges were commonplace, has been redefined. The Tier II Regulation A provided for by the JOBS Act would appear, on its face, to encapsulate the spirit and legislative intent of the statutes. For all the attention, and oftentimes misinformation, regarding crowdfunding, the solicitation of crowdfunding and nature of securities sold in Rule 506 offerings, Tier II provides for a true limited initial public offering that is accessible and feasible for small businesses.
About the Securities Compliance Group, Ltd.
Attorney Adam S. Tracy and the law firm of the Securities Compliance Group, Ltd. is a leading provider of corporate, corporate finance and securities legal services, compliance and consulting services to micro, small to mid-sized private and public entities, and cryptocurrency compliance. Our team is comprised of skilled, creative attorneys with a depth of experience in matters including registrations on Form 10, S-1 and S-8, reverse mergers, mergers and acquisitions, public company reporting including Form 10-K, proxy statements and solicitations, DTC eligibility and chill removal and much more. The firm holds offices in both Chicago, IL and Beverly Hills, Ca.
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[1] Factors That May Affect Trends in Regulation A Offerings, GAO-12-839: Published: Jul 3, 2012. Publicly Released: Jul 3, 2012.
[2] 17 C.F.R. §§ 230.251 through 230.263
[3] 15 U.S.C. § 77c(b)
[4] See 17 C.F.R. § 230.501(a)
[5] 15 U.S.C. § 78a
[6] Statement of Policy Regarding Multi-State Review of Requests for Interpretive Opinions and No-Action Letters, Northern American Securities Administrator Association. Publicly Released August 27, 2009.
[7] Rutheford B. Campbell, Jr., “Blue Sky Laws and the Recent Congressional Preemption Failure,” 22 Journal of Corporation Law (Winter 1997).
[8] Pub. L. No. 112-106, 126 Stat. 306.
