SEC Moves to Update Regulation A

Simon Riveles Jobs Act, Regulation A+, SEC

By Kathryn Dachille and Simon Riveles

December 18, 2013, the SEC voted to propose amendments to Regulation A that would allow  offerings of up to $50 million in any twelve month period (“Tier 2 offerings”), as mandated by Title IV of the JOBS Act (so called Regulation A+”). While Tier 2 offerings would be subject to significant additional requirements, such as the provision of audited financial statements, ongoing reporting obligations and certain limitations on sales, the SEC greatly enhanced the viability of the new offering regime by proposing to completely preempt state security law registration and qualification requirements.

Originally adopted in 1936, Regulation A was meant to offer a more simplified registration process for smaller issues.  Currently, Regulation A allows for an “exemption from SEC registration for securities offerings of up to $5 million, including up to $1.5 million by selling security holders, within a 12-month period.” However, due SEC filing requirements, the limited capital raise allowed and failure to preempt state registration requirements, the Regulation A offerings were rarely, if ever, conducted.

Regulation A+ seeks to address the issues currently plaguing the standing Regulation A while meeting the requirements imposed by Title IV. Regulation A+ “would permit companies to confidentially submit offering statements to the staff of the SEC for review before filing, introduce electronic filing and the ‘access equals delivery’ delivery model to Regulation A offerings, allow issuers to engage in ‘testing the waters’ communications with potential qualified investors before and after the offering is filed and also introduces a tiered offering system.

This tier system is currently proposed as a Tier 1, Tier 2, with the possibility of a Tier 3. Tier 1 largely mirrors current Regulation A, while Tier 2 seeks to meet the requirements of Title IV by dealing with offerings valued up to $50 million in a 12 month period, “including no more than $15 million by selling securityholders”. Tier 2 features more stringent standards, but represents somewhat of a hybrid between Tier 1 (or current Regulation A requirements) and the requirements imposed on reporting companies. Purchasers of Tier 2 offerings would be deemed “qualified purchasers’ under Section 18(b)(3) of the Securities Act thereby exempting the securities in question from state qualification and registration requirements.  Tier 2 offerings would, however, be subject to  investment limitations, enhanced disclosure and ongoing reporting obligations. For offerings up to $5 million, there is an option to be categorized as either a Tier 1 or Tier 2 offering. The potential Tier 3, which is dependent on public comment, may cover Regulation A offerings of between $10 million to $15 million, pre-empt state blue sky laws and have less-extensive continuing disclosure obligations than Tier 2 offerings.

However, the new proposed Regulation would not be applicable to all issuers, including companies reporting under the 1934 Act, investment companies, blank check companies, issuers of fractional undivided interests in oil, gas, or other mineral rights, private funds and ‘bad actors’ as defined under Rule 262 of the Securities Act (as amended by Regulation A+)”. While these exclusions also currently exist under Regulation A, the proposed regulation also includes two new exclusions: (a) issuers not having filed ongoing reports with the SEC during the two years immediately preceding the filing of a new offering statement, and (b) issuers subject to an SEC order denying, suspending or revoking the registration of a class of its securities pursuant to Section 12(j) of the Exchange Act (issued within the last five years).

In addition, certain securities will be ineligible under proposed Regulation A+; instead, only those types of securities specified in Section 3(b)(3) will qualify. Specifically, equity securities, debt securities, and debt securities convertible or exchangeable into equity interests (including any guarantees of such securities) offerings are eligible; asset-backed securities will continue to remain ineligible under the new framework.

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