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SEC Releases Regulation "A+" Proposal under JOBS Act
Practical Law Legal Update 4-552-7245 (Approx. 8 pages)
SEC Releases Regulation "A+" Proposal under JOBS Act
by Practical Law Corporate & Securities
| Published on 19 Dec 2013 • USA (National/Federal) |
The SEC proposed rules that would expand Regulation A, as required by Title IV of the JOBS Act.
On December 18, 2013, the SEC issued proposed rules and forms that would expand Regulation A, as required by Title IV of the JOBS Act. Section 401(a) of the JOBS Act amended Section 3(b) of the Securities Act to add new subsections (Sections 3(b)(2) through (5)), which require the SEC to amend Regulation A or adopt a new, similar regulation exempting certain securities offerings from Securities Act registration. The proposal, which has been referred to informally by practitioners as Regulation A+, is intended to increase access to capital for smaller companies.
Current Regulation A has not been widely used by issuers for a number of reasons, including:
- Offerings by an issuer under current Regulation A cannot exceed $5 million in any 12-month period.
- Unlike securities issued in offerings exempt under Rule 506 of Regulation D, securities issued in Regulation A offerings are not "covered securities" under the National Securities Markets Improvement Act (NSMIA). This means that the issuer typically must comply with the registration and qualification requirements of the blue sky laws of all relevant states, which are not preempted by NSMIA.
The proposed rules would expand current Regulation A as described below.
Scope of Regulation A
The proposed rules would create two tiers of Regulation A offerings:
- Tier 1. Tier 1 would reflect the same offering size limitations that currently apply under Regulation A. Tier 1 offerings could raise up to $5 million in a 12-month period, including up to $1.5 million in resales by parties other than the issuer.
- Tier 2. Tier 2 would reflect the offering size limitations in Section 3(b)(2). Tier 2 offerings could raise up to $50 million in a 12-month period, including up to $15 million in resales by parties other than the issuer.
For offerings up to $5 million, an issuer could elect whether to use Tier 1 or Tier 2.
Eligibility for Regulation A
Regulation A would be available to issuers organized and with their principal place of business in the US or Canada. However, it would not be available to companies that:
- Are reporting companies under the Exchange Act.
- Are investment companies under the Investment Company Act of 1940, as amended.
- Are development stage companies.
- Are issuing fractional undivided interests in oil, gas or other mineral rights.
- Have not filed the ongoing reports required by the proposed rules, as discussed below, during the two years immediately preceding the filing of the offering statement.
- Are or have been subject to an SEC order revoking the company's registration under the Exchange Act entered within five years before the filing of the offering statement.
- Are disqualified under the "bad actor" provisions of Rule 262, whose proposed amendment is discussed below.
Regulation A would not be available for offerings of asset-backed securities.
Key Requirements for Conducting Regulation A Offerings
The proposal would 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 these proposed Regulation A rules are discussed below.
Confidential Review Process
The proposal would allow for non-public submission of draft offering statements by issuers conducting offerings under Regulation A. All non-public submissions of draft offering statements would be submitted via EDGAR, similar to the confidential review process for emerging growth companies (EGCs) under Title I of the JOBS Act (see Practice Note, JOBS Act: On-ramp to the Capital Markets for Emerging Growth Companies Summary).
Issuers using Regulation A would be required to publicly file an offering statement no more than 21 calendar days before the offering statement is "qualified" by the SEC. The original submission and all subsequent non-public amendments and correspondence with the SEC would be required to be publicly filed as exhibits to the offering statement at least 21 calendar days before qualification of the offering statement.
Electronic Submission
All non-public submissions and filings would be made electronically via EDGAR, similar to the on-ramp process for EGCs under Title I of the JOBS Act.
Testing the Waters
Under the proposal, an issuer using Regulation A could 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 filed would be required to either include 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 the uniform resource locator (URL) where the preliminary offering circular or offering statement may be obtained on EDGAR.
Issuers would be required to submit or file testing the waters materials as an exhibit when the offering statement is either submitted for non-public review or filed (and would need to update 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 would be required to update and distribute the material, through any channel previously used to market the offering during this period, if either the material itself or the preliminary offering circular becomes inaccurate or inadequate in any material respect.
Whether or not an issuer or its intermediaries test the waters, each would remain 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.
Offering Statement
Issuers would be required to prepare an offering statement on Form 1-A, which would consist of three parts:
- Part I: Notification. This would be a fillable form with indicator boxes or buttons, similar to Form D. An issuer would be required to provide information about:
- itself;
- its eligibility to use Regulation A;
- any bad actor disqualification;
- the offering; and
- certain other items.
- Part II: Offering Circular. An issuer would have two choices in presenting its disclosure. It could provide disclosure based on either:
- "Offering Circular" disclosure standards that are set out in proposed Part II to Form 1-A; or
- the requirements of Part I of a Form S-1, which could be limited to those applicable to smaller reporting companies if the issuer could qualify as such.
- Part III: Exhibits.
Part II disclosure would include an MD&A section and two years of financial statements. Issuers conducting Tier 2 offerings would be required to provide audited financial statements.
The offering statement would be qualified only by SEC order.
Exit Reporting
Regulation A issuers would be required to provide updated summary offering information after termination or completion of an offering.
Tier 1 issuers would be required to provide this information in a Form 1-Z. Information in a Form 1-Z would include:
- The date the offering was qualified and commenced.
- The number of securities qualified.
- The number of securities sold in the offering.
- The price of the securities.
- Any fees associated with the offering.
- The amount of net proceeds to the issuer.
Tier 1 issuers would be required to file a Form 1-Z within 30 calendar days after termination or completion of the offering.
Tier 2 issuers would be required to provide this information in their annual reports on Form 1-K (see On-going Reporting Requirements). However, a Tier 2 issuer that elects to terminate its on-going reporting requirement before it had disclosed this information in a Form 1-K could instead satisfy this requirement by including this information in the exit report on Form 1-Z.
Bad Actor Disqualification
A securities offering would be disqualified from relying on Regulation A if the issuer or other covered persons are felons or other "bad actors." This provision would be conformed to the bad actor disqualification in new Rule 506(d).
Covered persons would be the same as covered persons under Rule 506(d) other than those specific to funds, which would not be eligible to use Regulation A. Covered persons would 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 would be the same as 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 would have to 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 revised Regulation A in the offering circular.
Additional Requirements for Tier 2 Offerings and Issuers
Issuers conducting Tier 2 offerings would be subject to the following additional requirements.
Investor Restrictions
Investors would be limited to purchasing securities in an amount not to exceed 10% of their annual income or net worth, whichever is greater. Annual income and net worth would be calculated as provided in the definition of accredited investor in Rule 501 of Regulation D.
Tier 2 issuers would be required to inform investors of the investment limitations but could otherwise rely on an investor's representation of compliance with the limitations unless the issuer knew, at the time of sale, that the representation was not true.
Audited Financial Statements
As described above, Tier 2 issuers would have to provide two years of audited financial statements in their offering circulars.
On-going Reporting Requirements
Tier 2 issuers would be required to file reports via EDGAR similar to those required for public company reporting. These would include:
- Annual reports on new Form 1-K. Form 1-K would include 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, MD&A and two years of audited financial statements. Form 1-K would be required to be filed within 120 days after the issuer's fiscal year end.
- Semiannual reports on new Form 1-SA. Form 1-SA would include financial statements and MD&A. The financial statements could be unaudited. The Form 1-SA would be required to be filed within 90 days after the end of the issuer's second fiscal quarter.
- Current event updates on new Form 1-U. Issuers would have to 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 audit reports, departure of the principal executive, financial or accounting officers, and unregistered sales of 5% of more of outstanding equity securities. Form 1-U would be required to be filed within four business days after the occurrence of an event.
This ongoing reporting requirement would not constitute reporting under the Exchange Act and the issuer would not be required to register under the Exchange Act because of this.
In addition, Tier 2 issuers would be required to provide certain special financial reports on Form 1-K and Form 1-SA. The financial statement report would 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.
- 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.
A Tier 2 issuer could exit the ongoing reporting regime:
- 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; and
- there is no ongoing Regulation A offering.
Preemption of Blue Sky Laws
In light of the investor protections provided by the proposal, the registration and qualification provisions of state blue sky laws would be preempted for:
- All offerees in a Regulation A offering.
- All purchasers in a Tier 2 offering.
The proposal would accomplish this by defining "qualified purchaser" under Section 18(b)(3) of the Securities Act to include these parties.
As a result, Tier 1 issuers would still be subject to the registration and qualification provisions in each state in which there are purchasers of securities in a Tier 1 offering.
However, the proposal requests comment on alternative approaches to blue sky preemption, including whether blue sky laws should be fully preempted by the rules.
Additional Matters
The proposed rules also cover:
- Integration with other securities offerings. The proposal would provide that offers and sales under Regulation A are not integrated with any other offering made before the commencement of or more than six months after the completion of a Regulation A offering. Proposed Rule 255(e) would also provide a safe harbor from integration of an abandoned Regulation A offering with a later registered offering if the issuer did not solicit interest from persons other than qualified institutional buyers and institutional accredited investors. In addition, Regulation A offerings would not be integrated with crowdfunding offerings under Title III of the JOBS Act.
- Liability under Section 12(a)(2) of the Securities Act.
- Delivery requirements for offerings statements that are substantially the same as the access equals delivery model for registered offerings.
- Treatment under Section 12(g) of the Exchange Act. Regulation A securities would not be exempt from calculating the asset and record holder thresholds under Section 12(g).
- 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 Rule 15c2-11 under the Exchange Act 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 aggregate offering amounts under Tier 1 and Tier 2, issuer eligibility, making offers in accordance Rule 251(d)(1), or the scope of permissible continuous or delayed offerings under Rule 251(d)(3) would be considered significant.