SEC Adopts Final Regulation "A+" Rule Amendments under JOBS Act

Practical Law Legal Update 2-606-1618 (Approx. 11 pages)

SEC Adopts Final Regulation "A+" Rule Amendments under JOBS Act

by Practical Law Corporate & Securities

Scope of Amended Regulation A

As under the 2013 rule proposal, the final rules will create two tiers of offerings under amended Regulation A:

Tier 1. Tier 1 will be available for offerings of up to $20 million in a 12-month period, including up to $6 million on behalf of selling securityholders that are affiliates of the issuer. (Under the 2013 rule proposal, Tier 1 would have been available for offerings up to $5 million in a 12-month period, with resales on behalf of selling securityholders limited to $1.5 million.)
Tier 2. Tier 2 will be available for offerings of up to $50 million in a 12-month period, including up to $15 million on behalf of selling securityholders that are affiliates of the issuer.

For offerings up to $20 million, an issuer may choose to use Tier 1 or Tier 2. Applicable restrictions on secondary sales under Regulation A are discussed in more detail below (see Limitations on Secondary Sales).

Both Tiers are subject to certain basic offering requirements, while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements, as described in more detail below.

Eligibility for Amended Regulation A

Amended Regulation A is available to issuers organized in and with their principal place of business in the US or Canada. However, it is not available to companies that are:

Reporting companies under the Exchange Act.
Investment companies under the Investment Company Act of 1940, as amended (the Investment Company Act).
Business development companies, as defined in Section 2(a)(48) of the Investment Company Act (BDCs).
Development stage companies that have no specific business plan or purpose or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies (blank check companies).
Issuing fractional undivided interests in oil, gas or other mineral rights.
Required to file, but have not filed, the ongoing reports required by the final rules under amended Regulation A, as discussed below, during the two years immediately preceding the filing of a new offering statement (or for any shorter period the issuer was required to file those reports).
Subject to, or have been subject to, an SEC order denying, suspending or revoking the registration of a class of securities under Section 12(j) of the Exchange Act entered within five years before the filing of the offering statement.
Disqualified under the "bad actor" provisions of Rule 262, amended as discussed below.

Despite suggestions by commenters to further expand issuer eligibility, the SEC declined to make Regulation A available to non-Canadian foreign issuers, BDCs or Exchange Act reporting companies.

Regulation A is not available for offerings of asset-backed securities.

Securities eligible for sale under Regulation A are limited to equity securities, debt securities and debt securities convertible or exchangeable into equity, including any guarantees. This list of eligible securities tracks Section 3(b)(3) of the Securities Act.

Limitations on Secondary Sales

The final rules limit the amount of securities that can be sold by selling securityholders at the time of the issuer's first Regulation A offering and during the following 12 months to no more than 30% of the aggregate offering price of any particular offering.

After the expiration of this initial 12-month period, the final rules differentiate between secondary sales by affiliates and by non-affiliates. Specifically, following the expiration of the first year after an issuer's initial qualification of an offering statement, secondary sales under qualified offering statements by:

Affiliates of the issuer are limited to no more than $6 million, in the case of Tier 1 offerings, or no more than $15 million, in the case of Tier 2 offerings, in each case over a 12-month period.
Non-affiliates are limited only by the maximum offering amount permitted by either Tier 1 ($20 million) or Tier 2 ($50 million) during any 12-month period. Sales by the issuer and secondary sales by affiliates are aggregated with non-affiliated secondary sales for these purposes when calculating compliance with the maximum offering amount under Tier 1 or 2.

Key Requirements for Conducting Offerings under Amended Regulation A

The final rules modernize the Regulation A qualification, communications and offering process to reflect analogous provisions of the Securities Act registration process, including requiring electronic filing of offering materials. Key provisions of the final rules for amended Regulation A are discussed below.

Confidential Review Process

Under the final rules, issuers whose securities have not previously been sold under a qualified offering statement under Regulation A or under an effective registration statement under the Securities Act may submit a draft Regulation A offering statement to the SEC for non-public review. All non-public submissions of draft offering statements must be submitted through EDGAR, similar to the confidential review process for emerging growth company (EGC) registration statement introduced under the JOBS Act.

An issuer that elects non-public review by the SEC must later make its initial non-public submission, all its non-public amendments and all its related correspondence with the SEC publicly available on EDGAR by filing those documents as exhibits to its offering statement, which must be publicly filed at least 21 calendar days before the offering statement is qualified by the SEC.

Electronic Submission

All non-public submissions and all public filings under Regulation A must be made electronically through EDGAR.

Testing the Waters

Under the final rules, an issuer using Regulation A may obtain indications of interest from any potential investor both before and after filing the offering statement, a practice known as "testing the waters." Testing the waters materials used after the offering statement is publicly filed must either be accompanied by a current preliminary offering circular or contain information on how the most current preliminary offering circular can be obtained. The requirement could be satisfied by providing a website where the preliminary offering circular or offering statement may be obtained (including on EDGAR).

Issuers must include testing the waters materials as an exhibit to the offering statement when it is either first submitted for non-public review or first filed (and must update the exhibit for substantive changes in the testing the waters materials after the initial non-public submission or filing). Issuers and intermediaries using testing the water materials after publicly filing the offering statement must update and redistribute the materials in a substantially similar manner as those materials were originally distributed to the extent that either the materials themselves or the preliminary offering circular becomes inaccurate or inadequate in any material respect.

Testing the waters materials are subject to the antifraud and other civil liability provisions of the federal securities laws.

Whether or not an issuer or its intermediaries test the waters, each remains obligated in the pre-qualification period to deliver a copy of the preliminary offering circular to prospective purchasers at least 48 hours before a sale (unless the issuer is already subject to, and current in, Regulation A Tier 2 ongoing reporting obligations before the offering).

Offering Statement

Issuers are required to prepare an offering statement on Form 1-A, which consists of three parts:

Part I: Notification. This is a fillable form with indicator boxes or buttons, similar to Form D. An issuer is required to provide information about:
- itself, including information about its industry, number of employees, financial statements and capital structure;
- its eligibility to use Regulation A;
- any bad actor disqualification;
- the offering, including whether the offering is a Tier 1 or Tier 2 offering, the amount and type of securities offered, the names of audit and legal service providers and other information;
- the jurisdictions in which the securities will be offered; and
- certain other items.
Part II: Offering Circular. An issuer has three choices in presenting its disclosure. It can provide disclosure based on:
- "Offering Circular" disclosure standards that are set out in Part II to amended Form 1-A;
- the requirements of Part I of Form S-1, which could be limited to those applicable to smaller reporting companies (SRCs) if the issuer qualifies as an SRC; or
- the requirements of Part I of Form S-11 for offerings by REITs and similar issuers, if the offered securities are eligible to be registered on that form (as with issuers using Part I of Form S-1, an issuer that qualifies as an SRC need only comply with the requirements of Part I of Form S-11 as they apply to SRCs).
Part III: Exhibits.

Part II offering circular disclosure must include risk factors, a business section, an MD&A section, executive compensation disclosure, plan of distribution disclosure and two years of financial statements, among other items. Similar to an SRC in the context of a registered offering, a Regulation A issuer must provide MD&A disclosure on its results of operations for the two most recently completed fiscal years and interim periods, when applicable.

Issuers conducting Tier 2 offerings are required to provide financial statements that are audited in accordance with either US generally accepted auditing standards (US GAAS) or the standards issued by the Public Company Accounting Oversight Board (PCAOB).

Qualification Process for Offering Statements

Under the final rules, an offering statement may only be qualified under amended Regulation A by a "notice of qualification" issued by the SEC's Division of Corporation Finance. The notice of qualification is analogous to a notice of effectiveness issued in a registered offering.

Because qualification is never automatic and can only occur on the issuance of a notice of qualification, issuers need not include a delaying notation in early drafts of the offering statement to delay qualification.

Exit Reporting

Regulation A issuers are required to provide updated summary offering information after termination or completion of an offering.

Tier 1 issuers must provide this information in a Form 1-Z. Information required in a Form 1-Z includes:

The date the offering was qualified and commenced.
The amount of securities qualified.
The amount of securities sold in the offering.
The price of the securities.
The portions of the offering sold on behalf of the issuer and on behalf of any selling securityholders.
Any fees associated with the offering.
The amount of net proceeds to the issuer.

Tier 1 issuers must file a Form 1-Z within 30 calendar days after termination or completion of the offering.

Tier 2 issuers must provide this information in their annual reports on Form 1-K (see Ongoing Reporting Requirements). However, a Tier 2 issuer that elects to terminate its ongoing reporting requirement before it has disclosed this information in a Form 1-K may satisfy this requirement by instead including this information in its exit report on Form 1-Z.

Bad Actor Disqualification

A securities offering is disqualified from relying on Regulation A if the issuer or other covered persons are felons or other "bad actors." The final rules substantially conform the Regulation A disqualification provisions to the bad actor disqualification provisions in Rule 506(d) of Regulation D.

The covered persons and triggering events are substantially the same as the covered persons and triggering events under Rule 506(d), other than those specific to funds, which are not eligible to use Regulation A. Covered persons include:

The issuer, any predecessor and any affiliated issuer.
Any of the issuer's directors, executive officers (or other officers participating in the offering), general partners or managing members.
Any 20% beneficial owner of the issuer (calculated by voting power).
Any promoter connected with the issuer at the time of filing of the offering statement, any offer after qualification or sale.
Any compensated solicitor for the offering or any general partner or managing member of that solicitor.
Any director, executive officer or other officer participating in the offering of any compensated solicitor or any general partner or managing member of that compensated solicitor.

The disqualifying events under amended Regulation A include all of the disqualifying events under Rule 506(d), except that the convictions, judgments, injunctions, court orders, regulatory orders, and SEC disciplinary, cease-and-desist or stop orders must bar the covered person at the time of filing of the offering statement (as opposed to the time of sale specified in Rule 506(d)). For the list of disqualifying events under Rule 506(d), see Practice Note, Section 4(a)(2) and Regulation D Private Placements: Bad Actors Disqualified from Relying on Safe Harbor.

Also similar to Rule 506(d), a Regulation A issuer would not lose the exemption if it could show that it did not know and, in the exercise of reasonable care, could not have known of the existence of the disqualifying event.

Issuers must disclose in Part II of Form 1-A (see above) events that would have constituted disqualifying events except that they occurred before the effective date of the amendments to Regulation A.

Additional Requirements for Tier 2 Offerings and Issuers

Issuers conducting Tier 2 offerings are also subject to the following additional requirements.

Investor Restrictions

In Tier 2 offerings, unless the offered securities will be listed on a national securities exchange when the offering is qualified, purchasers must be either:

Accredited investors, as defined in Rule 501 of Regulation D.
Limited to purchasing securities in an amount not to exceed:
- for natural persons, 10% of the greater of annual income or net worth, as calculated under Rule 501 of Regulation D; and
- for non-natural persons, 10% of the greater of annual revenue or net assets at fiscal year end.

Tier 2 issuers are required to inform investors of these investment limitations. Issuers may rely on an investor's representation of compliance with the limitations unless the issuer knows, at the time of sale, that the representation is not true.

Audited Financial Statements

As described above, Tier 2 issuers must include in their offering circulars two years of financial statements audited in accordance with either US GAAS or the standards issued by the PCAOB.

Ongoing Reporting Requirements

Under the final rules for amended Regulation A, Tier 1 issuers are not subject to any ongoing reporting requirements other than the summary offering information required on Form 1-Z to report the termination or completion of an earlier offering (see Exit Reporting).

In contrast, Tier 2 issuers must file reports on EDGAR similar to those required for reporting companies under the Exchange Act:

Annual reports on Form 1-K. Form 1-K requires information on business operations, related party transactions, beneficial ownership of voting securities, identification of directors, executive officers and significant employees, executive compensation data for the three most highly paid officers, an MD&A section and two years of financial statements audited in accordance with US GAAS or the standards issued by the PCAOB. Form 1-K must be filed within 120 days after the issuer's fiscal year end.
Semiannual reports on Form 1-SA. Form 1-SA must include interim financial statements and an MD&A section. The financial statements may be condensed and are not required to be audited or reviewed. The Form 1-SA must be filed within 90 calendar days after the end of the first six months of the issuer's fiscal year. Form 1-SA also requires the issuer to include updates that are otherwise reportable on Form 1-U.
Current event reports on Form 1-U. Issuers must report fundamental changes in the nature of their business, bankruptcy or receivership, material modifications of securityholders' rights, changes in accountants, changes in control, non-reliance on previous financial statements or a related audit report or interim review, departure of the principal executive, financial or accounting officers, and unregistered sales of 10% or more of outstanding equity securities. Form 1-U must be filed within four business days after the occurrence of the triggering event.

These ongoing reporting requirements do not constitute reporting under the Exchange Act and the issuer is not required to register under the Exchange Act because of this.

In addition, in some circumstances, Tier 2 issuers must provide certain special financial reports on Form 1-K and Form 1-SA. The special financial report is designed to close the lengthy gap in financial reporting between the financial statements included in an issuer's Form 1-A and its first periodic report due after the qualification of its offering statement. The special financial reports, which are analogous to those required under Exchange Act Rule 15d-2, require:

Audited financial statements for the issuer's last completed fiscal year to be filed no more than 120 calendar days after qualification of the offering statement if the offering statement did not include these financial statements. This must be filed on a Form 1-K.
Semiannual financial statements for the first six months of the issuer's fiscal year, which may be unaudited, to be filed 90 calendar days after qualification of the offering statement if the offering statement did not include these financial statements and was qualified in the second half of the issuer's fiscal year. This must be filed on a Form 1-SA.

A Tier 2 issuer can exit the ongoing reporting regime either:

When it becomes subject to Exchange Act reporting requirements.
At any time after completing reporting for the fiscal year in which the offering statement was qualified, by filing a Form 1-Z exit report, if:
- it has filed all ongoing reports required by Regulation A for the shorter of the period since it became subject to these requirements and the most recent three fiscal years plus the portion of the year preceding the date of filing the Form 1-Z;
- there are fewer than 300 record holders of the securities of the class that were offered (1,200 record holders if the issuer is a bank or a bank holding company); and
- there is no ongoing Regulation A offering.

Relationship with State Securities Laws

The final rules for amended Regulation A preempt the registration and qualification requirements of state blue sky laws in Tier 2 offerings. The final rules accomplish this by defining the term "qualified purchaser" under Section 18(b)(3) of the Securities Act to include any person to whom securities are offered or sold in a Tier 2 offering. Effectively, this means that all securities in a Tier 2 offering are "covered securities" under NSMIA and therefore exempt from state registration and qualification requirements.

However, the definition of qualified purchaser does not include offerees or purchasers in Tier 1 offerings. Accordingly, a Tier 1 issuer is subject to the state securities law registration and qualification requirements of each state where it makes offers or sales of its securities.

Notably, while amended Regulation A permits issuers to test the waters and make offers in the pre-qualification period at the federal securities law level, state securities regulators retain oversight over how Tier 1 offerings are conducted at the state securities law level. While the SEC acknowledges that this could inhibit the use of solicitation materials in Tier 1 offerings, it believes the states should be able to regulate the use of solicitation materials in Tier 1 offerings.

State securities regulators also retain the authority, in both Tier 1 and Tier 2 offerings, to:

Investigate and bring enforcement actions for fraudulent securities transactions and unlawful conduct by broker-dealers.
Require issuers to file with the states any document filed with the SEC, to submit a consent to service of process and to pay any required fee.
Enforce any state filing and fee requirements by suspending the offer or sale of securities within a given state.

Because a Tier 1 issuer must simultaneously seek qualification of its offering statement by the SEC and registration or qualification of its offering by all relevant state securities regulators, issuers should consider whether to take advantage of the multi-state coordinated review program for Regulation A offerings recently launched by the North American Securities Administrators Association (NASAA). Under the coordinated review program, issuers are required to file Regulation A offering materials with the states by emailing the required documents to the administrator of the coordinated review program. The administrator must then select a lead disclosure examiner and, where applicable, a lead merit examiner, which are responsible for drafting and circulating comment letters to the participating jurisdictions, and for seeking resolution of those comments with the issuer and its counsel. As enacted, this NASAA program contemplates a turnaround of 21 business days from the date an issuer files its offering statement until it receives comments from the states.

Integration with Other Securities Offerings

Under the final rules, Regulation A offerings will not be integrated with any earlier offers or sales of securities or any later offers and sales of securities that are:

Registered under the Securities Act, except as described below in the case of a registered offering following certain abandoned Regulation A offerings.
Made under the Rule 701 exemption for employee incentive compensation.
Made under an employee benefit plan.
Made under Regulation S.
Made under the JOBS Act crowdfunding exemption.
Made more than six months after the completion of the Regulation A offering.

In addition, the final rules provide a limited safe harbor from integration where an issuer abandons a contemplated Regulation A offering before qualification but after having engaged in solicitations of interest (testing the waters) with potential investors. Specifically, where the issuer engaged in testing the waters only with qualified institutional buyers (QIBs) and institutional accredited investors (IAIs), the abandoned Regulation A offering will not be integrated with a later registered offering. Where the issuer engaged in testing the waters with persons other than QIBs and IAIs, the abandoned Regulation A offering will not be subject to integration as long as the issuer waits at least 30 calendar days between its last solicitation of interest in the Regulation A offering and the filing of its registration statement with the SEC.

Additional Matters

The final rules also cover:

Liability under Section 12(a)(2) of the Securities Act.
Delivery requirements for offering statements that are substantially the same as the "access equals delivery" model for registered offerings.
Treatment under Section 12(g) of the Exchange Act. Securities issued in Tier 2 offerings under Regulation A are conditionally exempted from the provisions of Section 12(g) as long as the issuer:
- remains subject to, and is current in (as of its fiscal year end) its, Regulation A periodic reporting obligations;
- engages the services of a transfer agent registered with the SEC under Section 17A of the Exchange Act; and
- has a public float of less than $75 million as of the last business day of its most recently completed semi-annual period or, in the absence of a public float, annual revenues of less than $50 million, as of its most recently completed fiscal year.
Exchange Act registration concurrent with a Regulation A offering. A Tier 2 issuer wishing to register a class of Regulation A securities under the Exchange Act may do so by filing a Form 8-A short-form registration statement in conjunction with the qualification of its Form 1-A. An issuer wishing to take this approach must prepare its offering circular using the Part I of Form S-1 disclosure model (discussed above). An issuer registering a class of securities under the Exchange Act concurrently with a Regulation A offering will become an Exchange Act reporting company as soon as its Form 8-A becomes effective. All ongoing reporting obligations under Regulation A will be suspended as long as the issuer remains subject to the reporting requirements of Section 13 of the Exchange Act.
The scope of permissible continuous or delayed offerings under Regulation A and the related concept of offering circular supplements.
Using an issuer's ongoing reports under Tier 2 to satisfy a broker-dealer's obligation under Exchange Act Rule 15c2-11 to review and maintain certain information about an issuer's quoted securities.
A safe harbor for insignificant deviations from provisions of Regulation A. Any deviation from the aggregate offering limits under Tier 1 and Tier 2, issuer eligibility requirements, making offers in accordance Rule 251(d)(1), or the scope of permissible continuous or delayed offerings under Rule 251(d)(3) are considered significant and therefore ineligible for this safe harbor.

Effective Date

Amended Regulation A will be effective 60 days after publication of the final rule amendments in the Federal Register.

SEC Adopts Final Regulation "A+" Rule Amendments under JOBS Act | Practical Law