Section 508 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (Public Law No. 115-174 (May 24, 2018)) expanded the availability of Regulation A (17 C.F.R. §230.251 et. seq.) by requiring the SEC to remove the requirement that the company issuing securities not be subject to the Securities and Exchange Act of 1934 (the 1934 Act) reporting requirements immediately before such offering. In addition, it required the SEC to amend Regulation A so that any company that is subject to Section 13 or 15(d) of 1934 Act is deemed to have met the periodic and current reporting requirements of Regulation A if it satisfies the Section 13 reporting requirements.
The SEC has issued final rule amendments (Amendments) permitting companies reporting under Section 13 or 15(d) of the 1934 Act to offer securities pursuant to the registration exemption Regulation A. See Securities Act Release 33-10591 (Dec. 19, 2018). Previously, offerings pursuant to Regulation A were expressly limited to non-reporting companies. The Amendments also provide that, so long as the reporting company is current in its 1934 Act periodic reports, the reporting company has no additional periodic reporting obligations under Regulation A. The Amendments became effective on Jan. 31, 2019. Regulation A+ is the informal name given to the amended SEC rules that expanded the Regulation A offering exemption.
Who benefits. The Amendments provide existing SEC reporting companies with another option for capital raising when the amount sought is less than $50 million, particularly those with non-exchange-listed securities and those not S-3 eligible for primary offerings. Regulation A+ is an alternative to a small registered IPO and as either an alternative or a complement to other securities offering methods that are exempt from registration under the Securities Act of 1933 (1933 Act) such as Regulation D private placement.
How Regulation A+ works. Regulation A+ provides an exemption for U.S. and Canadian companies to raise up to $50 million in a 12-month period. Moreover, the exemption is available, subject to limitations on the amount, for the sale of securities by existing stockholders. Regulation A+ requires disclosure documents be filed with the SEC on EDGAR, allows the confidential review of offering documents, and permits certain “testing the waters” communications. Issuers are permitted to “test the waters” with, or solicit interest in a potential offering from the general public, either before or after the filing of the offering statement, provided that all solicitation materials include the legends required by Regulation A+ and, after publicly filing the offering statement, are preceded or accompanied by a preliminary offering circular or contain a notice informing potential investors where and how the most current preliminary offering circular can be obtained.
Regulation A+ provides two tiers of offerings:
• Tier 1, consists of securities offerings of up to $20 million in any 12-month period, including no more than $6 million on behalf of selling securityholders that are affiliates of the issuer. For offerings of up to $20 million, an issuer can elect whether to proceed under Tier 1 or Tier 2. According to the SEC’s December 2018 adopting release for the Amendments, approximately 85 percent of the capital raised by companies between June 2015 and September 2018 was raised pursuant to a Tier 2 offering.
• Tier 2, which consists of securities offerings of up to $50 million in any 12-month period, including no more than $15 million on behalf of selling securityholders that are affiliates of the issuer.
A Tier 2 offering limits the amount of securities that an investor who is not an accredited investor under Rule 501(a) of Regulation D can purchase in a Tier 2 offering to no more than: (a) 10 percent of the greater of annual income or net worth (for natural persons); or (b) 10 percent of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons).
An issuer is permitted to begin selling securities pursuant to Regulation A+ once the offering statement has been qualified by the SEC which is analogous to a notice of effectiveness in registered offerings.
Applicability of state securities laws. In addition to qualifying the offering with the SEC, issuers in Tier 1 offerings must register or qualify their offering in any state in which they seek to offer or sell securities pursuant to Regulation A+.
While a Tier 2 offering is required to be qualified with the SEC before sales can be made, a Tier 2 offering is not required to register or qualify the offering with state securities regulators. Tier 2 offerings, however, remain subject to state law enforcement and antifraud authority. Additionally, a Tier 2 issuer offering may be subject to filing fees in the states in which they intend to offer or sell securities and be required to file with such states any materials that the issuer has filed with the SEC as part of the offering. The failure to file, or pay filing fees regarding, any such materials may cause state securities regulators to suspend the offer or sale of securities within their jurisdiction.
The following summarizes the provisions governing Tier 1 and Tier 2 offerings pursuant to Regulation A+.
Offering Limit: Tier 1: Up to $20 million in a 12-month period. Tier 2: Up to $50 million in a 12-month period.
SEC Filing Requirements: Tier 1 and Tier 2: Must file with the SEC a Form 1-A, which must be reviewed and qualified by the SEC.
Blue Sky Requirements: Tier 1: Blue sky law compliance is required, with the newly implemented North American Securities Administrators Association coordinated review process available. Tier 2: Exempt from state law review, subject to state filing and anti-fraud authority, for offerings to qualified purchasers or where securities are listed on an national securities exchange.
Limitations on Investors: Tier 1: No limits. Tier 2: Investment limit applicable for persons who are not accredited investors as described above.
Restrictions on Resale of Securities: Tier 1 and Tier 2: No restrictions on the resale of securities, except to the extent that the securities are held by affiliates.
Offering Communications: Tier 1 and Tier 2: An issuer may “test the waters” to determine if there is interest in a proposed offering prior to filing the Form 1-A. Sales literature may be used before the filing of the Form 1-A, after filing, and following qualification.
Financial Statement Requirements: Tier 1: Audited financial statements only if prepared for other purposes. If audited, then must be audited by an independent accountant, but not required to be PCAOB-registered. Current balance sheet, income statement for two years, as well as any interim period. Tier 2: Audited financial statements required, reviewed by an independent accountant and prepared in accordance with PCAOB standards. Current balance sheet, income statement for two years, as well as any interim period.
Disqualification Provisions: Tier 1 and Tier 2: Felons and “bad actors” as defined are disqualified.
Ongoing Reporting: Tier 1: A termination report required. Tier 2: Subject to on-going reporting obligation, including a requirement to file: current reports, semi-annual reports; and annual reports, until obligations are terminated or suspended.
Peter M. Fass is a partner at Proskauer Rose.