The Two Tiers of Regulation A+
Prior to this rule amendment, Regulation A was a seldom used exemption that allowed nonpublic companies to raise up to $5 Million in a 12 month period without having to file a Registration Statement. This exemption was seldom used because it still required a filing and comment process with the Commission and was subject to non-uniform Blue Sky Regulation, by the 50 states, which in some cases required audited financial statements while the filing with the Commission did not. The changes to Regulation A make it more useful for capital raising and remove or eliminate most of the problems with multiple state regulation.
Tier 1 Offerings - Similar to the current version of Regulation A, and subject to multi-state regulation, offerings of up to $20 Million in a 12 month period, including sales of $6 Million on behalf of selling securities holders that are affiliated of the issuer. Tier 1 offerings are essentially the same as offerings under the current Regulation A. The Tier 1 offerings would remain subject to state blue sky regulation and qualification, and the issuers would continue to have limited disclosure obligations after the effectiveness of the offering.
Tier 2 Offerings - The limit for the offering size would be raised to $50 Million in a 12 month period, including no more than $15 Million on behalf of selling securities holders that are affiliates of the issuer. Tier 2 Offerings would be exempt from Blue Sky regulation and qualification, but would be subject to stricter offering statement disclosure requirements, including Commission required audited financial statements.
Additionally, issuers would be subject to ongoing reporting obligations, including the filing of annual and semi-annual reports with the Commissions. This would essentially be a registrations with reduced requirements during and after.
Non-accredited investors purchasing securities in a Tier 2 offering would be limited to an investment equal to no more than 10 percent of the greater of the investor's annual income or net worth.
For offerings of up to $20 Million, the issuer can elect whether to proceed under Tier 1 or Tier 2. Both tiers would be subject to basic requirement as to issuer eligibility, disclosure, and other matters, drawn from the earlier provisions of Regulation A. Both tiers would also permit companies to submit draft offering statements for non-public review by Commission staff before filing, permit the continue use of solicitation materials after filing the offering statement, require the electronic filing of offering materials and otherwise align Regulation A with current practce for registers offerings.
For both Tier 1 and Tier 2 offerings, sales by all selling securities holders is limited to no more than 30 percent of a particular offering in the issuer's initial Regulation A offering and subsequent Regulation A offerings for the first 12 months following the initial offering.
Because Regulation A, prior to amendment was rarely used (the Commission only reported 19 Regulation A offerings between 2009 and 2012), it is expected that most private companies raising no more than $5 million , will continue to rely on Regulation D or another Securities Act exemption that is more streamlined than Regulation A, Tier 1.
Who Can Use Regulation A+
Regulation A+ is available to all issuers that are organized under the laws of, and have their principal place of business in the United States or Canada with the exception of the following:
SEC Reporting Companies
Investment Companies
Shell Companies or companies with not specific business plan or purpose
Issuers of Fractional Undivided Interests in Oil & Gas
Companies seeking to offer and sell asset backed securities
Issuers Disqualified by Regulation A's Bad Actor" Provisions
Issuers that have not Filed Ongoing Reports Required by Regulation A during the two years preceding the filing of the offering statement.
Issuers that have been subject to a Commission order denying, suspending or revoking their Exchange Act registration within five years before the filing of the offering statement.
What are the Investment Limitations Under Regulation A +
Offers and sales can be made to any investor, not just accredited investors. Investors in a Regulation A+ or Tier 2 offering may invest no more than 10% of the greater of their annual income or net worth. Although issuers in a Tier 2 offering would be required to inform prospective investors of the investment limit, they would not need to verify the investor's compliance. Issuers could rely on the investor's representation of net worth/annual income, unless the issuer knew, at the time of the sale, that the representation was false.
What Types of Securities Can be Offered Under Regulation A+ ?
Equity Securities
Debt Securities
Debt Securities Convertible or Exchangeable into Equity Securities
Options and Warrants Exercisable for Such Securities
Integration of Offerings
A Regulation A offering will not be integrated with:
1. prior offers or sales of securities; or
2. subsequent offers or sales of securities that are:
a. registered under the Securities Act, except as provided in Rule 255(e);
b. made in reliance on Rule 701;
c. made pursuant to an employee benefit plan;
d. made in reliance on Regulation S;
e. made pursuant to Section 4(a)(6) of the Securities Act [crowdfunded offerings]; or
f. made more than six months after the completion of the Regulation A offering.
As a result, an issuer could makie a private offering under Section 4(a)(2) or Regulation D prior to commencing a Regulation A offering without risking integration of the private offering with the Regulation A offering. An offering made under Regulation A should not be integrated with another exempt offering, provided that each exempt offering complies with the requirements for the exemption that is being relied upon for that particular offering. The final rule also addresses abandoned offerings in much the same way that these are handled by Rule 155, with a 30-day cooling off period.
The SEC reaffirmed guidance that was included in the proposing release which is consistent with the guidance regarding integration provided in Release 33-8828.
What is the Filing and Offering Process?
To offer securities under Regulation A, a company would filed an Offering Statement on Form 1- A, using the EDGAR filing system. While Regulation A currently permits automatic qualification of the offering, the proposed rule would require the Commission to affirmatively act to qualify the offering. A company that has not previously sold securities under Regulation A or an effective Securities Act registration statement would be able to submit a draft offering statement for non-public review by the Commission.
Further, a company interested in a Regulation A offering would be able to "test the waters" with potential investors prior to filing the offering statement. The company would be required to file such "test the waters" solicitation material as an exhibit to its offering statement.
As with a registered offering, if underwriters or broker/dealers are participating the Regulation A offering, the offering statement and the underwriting agreements would have to be filed with and approved by FINRA, unless an exemption were available.
It is not expected that the process for filing, review and qualification of a Regulation A offering statement to differ significantly from the process for filing, review and effectiveness of a registration statement under the Securities Act. As a result, it is not expected that the timetable for a Regulation A offering to differ significantly from that of a registered IPO. As such, companies with a more urgent need for capital and companies that do not want to undergo a Commission review process, will likely continue to choose a private placement rather than Regulation A.
The Offering Statement
The Regulation A offering statement would be filed on Form 1-A and consist of three sections: Part I (Notification) , Part II (Offering Circular), and Part III (Exhibits). Part I serves as notice of certain basic information about the company and the proposed offering, including, applicability of "bad actor" disqualification provisions. Part II, the offering circular, is similar to the prospectus in a registered offering, and Part ii, the exhibit section would be very similar to the exhibit section in a registered offering.
As currently proposed, the disclosure required in the offering circular would cover substantially all of the information required in Form S-1 for an IPO of an emerging growth company, including two years of audited financial statements for a Tier 2 offering. It would also include and Management Discussion and Analysis, risk factors, a three year description of the business, compensation information for the three most highly paid officers or directors and related party transaction disclosure. As a result, it is not expected that most companies would decide between a Regulation A offering and a registered offering on the basis of the required offering document disclosure.
Ongoing Reporting and Compliance
The major benefit of conducting a Regulation A offering instead of a registered offering may be in the differences reporting and compliance between the two.Some of the ongoing reporting and compliance obligations that come with and S-1Registration and NOT with a Regulation A offering include:
The Proxy Statement Rules
Section 16 reporting by directors, executive oficers, and 10% shareholders
Williams Act disclosure (Schedule 13D/G) by 5% shareholders
Audit Committee independence requirements of the Sarbanes-Oxley Act
Internal controls requirement of the Sarbanes-Oxley Act
Director and Officer loan prohibitions under the Sarbanes-Oxley Act
Sarbanes-Oxley CEO and CFO certifications
Conflict minerals and resource extraction disclosures required by the Dodd-Frank Act
However, a company that engages in a Tier 2 offering would have certain ongoing disclosure obligations, unlike a company offering its securities pursuant to Tier 1, a Regulation D exemption or a Rule 144A exemption or other traditional private placement exemption. A company with a qualified Tier 2 offering would be required to file annual, semiannual and current reports with the Commission using EDGAR until the company becomes a reporting company or, until there are fewer than 300 holders of record of the securities whose issuance gave rise to the reporting obligation.
Annual Reports on Form 1-K would be required for the fiscal year in which the offering statement became qualified and then for every fiscal year thereafter. The annual report would essentially update the information contained in the company's offering statement, including two years of audited financial statements. The anual report would be due within 120 days of the company's fiscal year end, giving Tier 2 companies more time than a Form 10-K filing deadline of 60 to 90 days, depending on the size of the company.
Semi-annual reports on Form 1-SA covering the first half of each fiscal year of the company would be required beginning with the first fiscal year for which financial statements relating to the first half of that year were not included in the offering statement. The semi-annual report would consist of unaudited financial statements and a Management Discussiona & Analysis (MD&A). The semi-annual report would be filed within 90 days of the end of the second quarter, compared to the Form 10-Q deadline of 40 or 45 days depending on the size of the company, and would only be filed once a year compared to three times for the Form 10-Q.
Current reports on Form 1-U would be required upon the occurrence of certain specified events, and would be filed withing four business days of the event, parallel to the Form 8-K filing requirement. Form 1-U reportable events are very similar to Form 8-K events, including bankruptcy; material modification in the rights of security holders; changes in accountants; non-reliance on previous financial statements; changes in control; departure of the principal executive officer, principal financial officer, or principal accounting officer; and, unregistered sales of 5% or more of outstanding equity securities. Additionally, any fundamental change in the company's business would trigger Form U-1 reporting. This fundamental change reporting event would be triggered by major and substantial changes i th eissuer's business or plan of operations or changes or changes reasonable expected to result in such changes, such as significant acquisitions or dispositions, or the entry into or termination of, a material definitie agreement that has or will resultin major and substantial changes to the nature of an issues's business or plan of operations.
Secondary Market and Blue Sky Laws
Securities sold under both Tier 1 and Tier 2 of Regulation A would have the status of publicly offered securities and therefore would not be "restricted securities" under the Securities Act of 1933, unlike securities sold in Regulation D or Rule 144A private placements.
Additionally, the company's ongoing reporting requirements after a Tier 2 offering would satisfy a broker-dealer's obligations under Rule 15c2-11 to maintain records of basic information about the company and its securities- permitting broker-dealers to publish quotes for the company's stock. This should facilitate secondary market activity in Regulation A securities.
State blue sky laws would be preempted for both the offer and sale of securities in Tier 2 offerings, a significant benefit over current Regulation A offerings, Tier ! offerings and Regultion D 505 and 504 offerings (Regulation D offerings are "covered securities" and pre-empted but restricted.) Blue sky laws would continue to apply to fraudulent conduct in Regulation A transactions as would, of course, the federal anti-fraud provisions.
