SEC Proposes Rules For Regulation A Regulation A; A Brief History

Post on: 4 Сентябрь, 2015 No Comment

SEC Proposes Rules For Regulation A+

On December 18, 2013, the SEC published proposed rules to implement Title IV of the JOBS Act, commonly referred to as Regulation A+. The proposed rules both add the new Section 3(b)(2) (i.e. Regulation A+) provisions and modify the existing Regulation A. This blog is limited to a discussion of the new Regulation A+.

Title IV of the JOBS Act technically amends Section 3(b) of the Securities Act, which up to now has been a general provision allowing the SEC to fashion exemptions from registration, up to a total offering amount of $5,000,000. Regulation A is and has historically been an exemption created under the powers afforded the SEC by Section 3(b).

Technically speaking, Regulation D, Rule 504 and 505 offerings and Regulation A offerings are promulgated under Section 3(b), and Rule 506 is promulgated under Section 4(a)(2). This is important because federal law does not pre-empt state law for Section 3(b) offerings, but it does so for Section 4(a)(2) offerings. The cost of compliance with the various and varied state laws can be prohibitive, especially with an offering limit of $5,000,000. Moreover, although Regulation A is technically an exemption from registration, it actually requires the filing of a registration statement with the SEC (Form 1-A), and such registration statement must clear comments. Accordingly, over the years, Rule 506 has become the private offering exemption of choice, and Rule 505 and Regulation A have rarely been used.

However, Regulation A securities are not restricted securities, and the new proposed Regulation A+ will pre-empt state law and otherwise provides benefits that make this a very attractive option for Issuers.

The New Regulation A+ -The JOBS Act Provisions

Section 401 of the JOBS Act amended Section 3(b) of the Securities Act to renumber the current Regulation A as Section 3(b)(1) and add new Section 3(b)(2), which requires the SEC to adopt a new exemption that includes the following terms and conditions:

(A) The aggregate offering amount of all securities offered and sold within the prior 12-month period in reliance on the exemption shall not exceed $50,000,000.

(B) The securities may be offered and sold publicly.

(D) The civil liability provisions in Section 12(a)(2) shall apply to any person offering or selling the securities.

(E) The Issuer may solicit interest in the offering prior to filing any offering statement in accordance with rules to be written by the SEC.

(F) The SEC shall require the Issuer to file annual financial statements with the SEC.

(G) A suggestion that the SEC require the Issuer to prepare and file an offering document and prospectus with the SEC, and that the SEC enact disqualifying bad boy provisions (Regulation A already has such provisions).

(H) The new exemption provided under Section 401 is limited to equity, debt and convertible debt securities, including any guarantees of such securities.

(I) The JOBS Act allows the SEC to make Regulation A+ Issuers file periodic reports analogous to current 10-Q and 10-K reports by Issuers subject to the reporting requirements of the Exchange Act. (Currently, Regulation A Issuers are not required to file periodic reports with the SEC.)

(J) Securities sold under Section 401(b) of the Jobs Act are “covered securities” for purposes of exempting those securities from state securities registration and offering requirements. That is, the new Regulation A+ pre-empts state law.

The SEC Proposed Rules

In drafting the proposed rules, the SEC reworked the entire Regulation A by bifurcating Regulation A into two tiers: Tier 1 for offerings up to $5 million in any 12-month period including up to $1.5 million for the account of selling security holders (the pre-existing Regulation A); and Tier 2 for offerings up to $50 million in any 12-month period including up to and up to $15 million for the account of selling security holders. The proposed rules both add the new Section 3(b)(2) (i.e. Regulation A+) provisions and modify the existing Regulation A.

The following is a summary of the proposed rules as set forth in the SEC rule release.

Eligible Issuers

As proposed, Regulation A+, like the existing Regulation A, would be available for any company organized in and with their principal place of business in U.S. or Canada. Regulation A+ is unavailable to any entity that is subject to the reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”) before the offering, investment companies, blank check companies, entities disqualified under bad actor provisions, Issuers of fractional undivided interests in oil or gas rights, or similar interests in mineral rights. Also disqualified are Regulation A+ Issuers who are delinquent with their ongoing Regulation A+ reporting requirements for over two years.

Notably, the SEC release confirms that shell companies (other than blank check shell companies) are not excluded from Regulation A+ offerings. However, the SEC does seek comment on this point and could make a change in the final rule release.

Eligible Securities

The proposed rules limits securities that may be issued under Regulation A+ to equity securities, including common and preferred stock and options, warrants and other rights convertible into equity securities, debt securities and debt securities convertible or exchangeable into equity securities, including guarantees. However, the proposed rules exclude asset-backed securities.

Offering Limitations and Secondary Sales

As noted above, the proposed rules divide Regulation A into two tiers: Tier 1 for offerings up to $5 million in any 12-month period including up to 30% of the offering (i.e. up to $1.5 million) for the account of selling security holders (the pre-existing Regulation A); and Tier 2 for offerings up to $50 million in any 12-month period including up to 30% of the offering (i.e. up to $15 million) for the account of selling security holders.

Sales for the account of security holders (secondary sales) will not be limited to affiliates or non-affiliates, but rather only limited to 30% of the overall offering.

Investment Limitation

The proposed rules would limit the investment amount for an individual investor in a Regulation A+ offering to no more than the greater of 10% of annual income or net worth. Calculation of income and net worth is as provided for accredited investors under Rule 501 of Regulation D. Issuers will be required to notify the investor of the investment limitation. However, Issuers will be able to rely on the investor’s representation of compliance, unless the Issuer knows such representation is untrue.

The proposed rules maintain current Regulation A integration standards. In particular, a Regulation A offering will not be integrated with any of the following: (i) prior offers or sales of securities; (ii) subsequent offers and sales of securities that are (a) registered under the Securities Act (subject to limitations where there has been solicitations of interest under the “test the waters” provisions; (b) made in reliance on Rule 701 (employee offerings) of the Securities Act; (c) made pursuant to an employee benefit plan; (d) Regulation S offerings (e) offerings made more than 6 months after completion of the Regulation A+ offering; or (f) crowdfunding offerings made under Regulation Crowdfunding .

Treatment under Section 12(g)

Exchange Act Section 12(g) requires that an Issuer with total assets exceeding $10,000,000 and a class of equity securities held of record by either 2,000 persons or 500 persons who are not accredited register with the SEC, generally on Form 10. and thereafter be subject to the reporting requirements of the Exchange Act. The proposed Regulation A+ rules specifically do not provide for any exclusions to the Section 12(g) requirements for Regulation A investors.

Liability under Section 12(a)(2)

Sellers of Regulation A+ securities have liability under Section 12(a)(2) to investors for any offer or sale by means of an offering circular or an oral communication that includes a material misleading statement or material misstatement of fact.

Offering Statement – Electronic Delivery

A company intending to conduct a Regulation A+ offering must file an offering statement with and have it qualified by the SEC. The offering statement will be filed with the SEC using the EDGAR database filing system. Investors must be provided with the final qualified offering statement prior to a sale of securities. Like current registration statements, the proposed Regulation A+ rules provide for an “access equals delivery” model, whereby access to the offering statement via the internet and EDGAR database will satisfy the delivery requirements.

Offering Statement – Non-Public (Confidential) Submission

As is allowed for Emerging Growth Companies, the proposed rules would permit an Issuer to submit an offering statement to the SEC on a confidential basis. Confidential submissions will allow a Regulation A+ Issuer to get the process under way while soliciting interest of investors using the “test the waters” provisions without negative publicity risk if it alters or withdraws the offering before qualification by the SEC. The confidential filing, SEC comments, and all amendments must be publicly filed as exhibits to the offering statement at least 21 calendar days before qualification.

Offering Statement – Form and Content

The proposed rules require use of new modified Form 1-A. Form 1-A consists of three parts: Part I – Notification, Part II – Offering Circular and Part III – Exhibits. Part I calls for certain basic information about the Issuer, and the offering and is primarily designed to confirm and determine eligibility for the use of the Form and a Regulation A offering in general. Part I will include Issuer information; Issuer eligibility, application of the bad actor disqualification and disclosure; jurisdictions in which securities are to be offered and unregistered securities issued or sold within one year.

Part II is the offering circular and is similar to the prospectus in a registration statement and in fact, an Issuer can choose to use Part I of Form S-1 as the offering circular in a Form 1-A offering statement. Part II requires disclosure of basic information about the Issuer and the offering, material risks; dilution, plan of distribution, use of proceeds; description of the business operations; description of physical properties; discussion of financial condition and results of operations (MD&A); identification of and disclosure about directors, executives and key employees; executive compensation; beneficial security ownership information; related party transactions; description of offered securities; and two years of financial information.

The required information in Part II of Form 1-A is scaled down from the requirements in Regulation S-K applicable to Form S-1 . Moreover, Issuers that had previously completed a Regulation A offering and had thereafter been subject to and filed reports with the SEC could incorporate by reference from these reports in future Regulation A offering circulars.

Form 1-A requires two years of financial information. All financial statements for Regulation A offerings must be prepared in accordance with GAAP. Financial statements of a Tier 1 Issuer are not required to be audited unless the Issuer has obtained an audit for other purposes. Audited financial statements are required for Tier 2 Issuers. For Tier 1, the accountants must meet independence standards but are not required to be registered with the Public Company Accounting Oversight Board. Audit firms for Tier 2 Issuers must be independent and PCAOB-registered.

Part III requires an exhibits index and a description of exhibits required to be filed as part of the offering statement.

Continuous or Delayed Offerings and Offering Circular Supplements

The proposed rules allow for continuous or delayed offerings (i.e. shelf offerings) using Regulation A+ (Tier 2 offerings). The proposed rule would provide for continuous or delayed offering for the following type of offerings: (i) securities offered or sold by or on behalf of a person other than the Issuer or its subsidiary (resale offerings ); (ii) securities offered and sold pursuant to a dividend or interest reinvestment plan or an employee benefit plan; (iii) securities issued upon the exercise of outstanding options, warrants, or rights; (iv) securities issued upon conversion of other securities; (v) securities pledged as collateral or (vi) securities which are offered beginning within two calendar days of the registration qualification date and which will be offered on a continuous basis and which will be offered for in excess of 30 days.

Amendments to the offering circular would be necessary for fundamental changes to the facts presented in the offering circular and to update the financial statements at least annually. Issuers will be required to remain current in their reporting with the SEC to maintain the qualification of the offering circular.

Currently S-1 is unavailable to an Issuer conducting a direct primary offering on a continuous or delayed basis. The ability to do so in a Regulation A+ offering is an attractive option.

Offering Price

All Regulation A offerings must be at a fixed price. That is, no offerings may be made “at the market” or for other than a fixed price.

Qualification

As with an S-1, the SEC would review the offering statement for accuracy and completeness of disclosure, not the merits of the company or the offered securities. Similar to any registration process, the SEC will issue comments and, upon clearing comments, the offering circular will be declared “qualified.” However, unlike other registration processes, a Regulation A or A+ offering circular will only be qualified by order of the commission, and not by the passing of any particular time period.

Solicitation of Interest (“Testing the Waters”)

Regulation A allows for pre-qualification solicitations of interest in an offering commonly referred to as “testing the waters.” All solicitation material must be submitted to the SEC as an Exhibit under Part III of Form 1-A. Issuers can use “test the waters” solicitation materials both before and after the initial filing of the offering statement. In the event that materials are issued after the filing of an offering circular, the materials must include a current preliminary circular or information on where one can be obtained. “Test the waters” solicitations may be made both orally and in writing.

Unlike the “testing of the waters” by emerging growth companies that are limited to QIBs and accredited investors, a Regulation A+ company could reach out to retail and non-accredited investors. After the public filing but before SEC qualification, a company may use its preliminary offering circular to make written offers.

Of course, all “test the waters” materials are subject to the antifraud provisions of federal securities laws.

Ongoing Reporting

Unlike current Regulation A, which does not require ongoing reporting with the SEC other than to report sales or termination of the offering, the proposed rules contemplate two levels of reporting for the two levels of offering (Tier 1 and Tier 2). A Tier 1 company will need to file certain information about the Regulation A offering, including information on sales and the termination of sales, on new Form 1-Z no later than 30 calendar days after termination or completion of the offering. Tier 1 issuers will not have any ongoing reporting requirements.

Tier 2 companies are also required to file certain offering termination information and would have the choice of using Form 1-Z or including the information in their first annual report on new Form 1-K. In addition to the offering summary information, Tier 2 Issuers would be required to submit ongoing reports including: an annual report on Form 1-K, semiannual reports on Form 1-SA, current event reports on Form 1-U and notice of suspension of ongoing reporting obligations on Form 1-Z (all filed electronically on EDGAR).

The ongoing reporting for Tier 2 companies is less demanding than the reporting requirements under the Securities Exchange Act of 1934. In particular, there are fewer 1-K items and only semi-annual 1-SA (rather than the quarterly 10-Q) and fewer events triggering Form 1-U (compared to Form 8-K ). The SEC anticipates that companies would use their Regulation A offering circular as the groundwork for the ongoing reports, and they may incorporate by reference text from previous filings.

The proposed rules also provide for a suspension of reporting obligations for a Regulation A Issuer that desires to suspend or terminate its reporting requirements. Termination is accomplished by filing a Form 1-Z and requires that a company be current over stated periods in its reporting, have fewer than 300 shareholders of record, and have no ongoing offers or sales in reliance on a Regulation A+ offering statement. Of course, a company may file a Form 10 to become subject to the full Exchange Act reporting requirements.

In addition to the reduced reporting noted above, a Tier 2 Issuer would not be subject to other Exchange Act compliance, including among others: SEC proxy statement rules; Section 16 reporting by directors, officers and 10% stockholders of ownership and transactions in Issuer securities; Section 13 disclosure by 5% stockholders; Regulation FD compliance to prevent selective disclosure of material information; internal financial and disclosure effectiveness controls under the Sarbanes-Oxley Act ; and CEO/CFO certifications required by Sarbanes-Oxley for periodic reports.

Exchange Act Rule 15c2-11 and Rule 144

The ongoing reporting obligations of a Tier 2 Issuer will be deemed to satisfy a broker-dealer’s obligation to review specific information about an Issuer before publishing a quotation. The ongoing reporting obligations of a Tier 2 Issuer will also satisfy the current information requirements under Rule 144 .

Freely tradable securities

Securities sold in a Regulation A+ offering, like those under current Regulation A, are not subject to transfer restrictions and are not restricted under Rule 144. Accordingly, it is contemplated that Regulation A Issuers could have a market maker file a 15c2-11 application on their behalf and establish a secondary trading market in their securities.

Relationship with State Securities Law

Under the proposed rules, Tier 2 offerings would pre-empt state law entirely. In addition, under the proposed rules, an Issuer would be able to “test the waters” for Tier 1 (up to $5 million), but would require federal and state review and qualification if, after determining investor interest, the Issuer files an offering statement.

Founding Partner, Legal & Compliance, LLC

Securities, Reverse Merger and Corporate Attorneys

Corporate and Securities Attorney Laura Anthony’s legal expertise includes but is not limited to registration statements, including Forms S-1, S-4, S-8 and Form 10. PIPE transactions, debt and equity financing transactions, private placements, reverse mergers, forward mergers, asset acquisitions, joint ventures, crowdfunding, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K, the proxy requirements of Section 14, Section 16 filings and Sarbanes-Oxley mandated policies. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Share Exchange Agreements. Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

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Regulation A+; A Brief History

Title IV of the JOBS Act – Small Capital Formation – is quickly being called the new Regulation A+. Title IV of the JOBS Act technically amends Section 3(b) of the Securities Act of 1933, which up to now has been a general provision allowing the Securities and Exchange Commission (SEC) to fashion exemptions from registration, up to a total offering amount of $5,000,000. The new provision will be Section 3(b)(2) with the old statutory language remaining and being relabeled as Section 3(b)(1).

Technically speaking Regulation D, Rule 504 and 505 offerings and Regulation A offerings are promulgated under Section 3(b) and Rule 506 is promulgated under Section 4(2). This is important because federal law does not pre-empt state law for Section 3(b) offerings but it does so for Section 4(2) offerings. The cost of compliance with the various and varied state laws can be prohibitive with an offering limit of $5,000,000. Moreover, although Regulation A is technically an exemption from registration, it actually requires the filing of a registration statement with the SEC (Form 1-A) and such registration statement must clear comments. Accordingly, over the years, Rule 506 has become the private offering exemption of choice and Rule 505 and Regulation A are rarely used.

The New Regulation A+

The JOBS Act amended Section 3(b) to add Section 3(b)(2) which requires the SEC to adopt a new exemption as follows:

(A) The aggregate offering amount of all securities offered and sold within the prior 12-month period in reliance on the exemption shall not exceed $50,000,000;
(B) The securities may be offered and sold publicly;
(C) The securities shall not be restricted;
(D) The civil liability provisions in Section 12(a)(2) shall apply to any person offering or selling the securities;
(E) The Issuer may solicit interest in the offering prior to filing any offering statement in accordance with rules to be written by the SEC;
(F) The SEC shall require the Issuer to file annual financial statements with the SEC;
(G) A suggestion that the SEC require the Issuer to prepare and file an offering document and prospectus with the SEC and that the SEC enact disqualifying bad boy provisions (Regulation A already has such provisions).

The new regulation is limited to equity, debt and convertible debt securities. Moreover, the new rule allows the SEC to make Regulation A+ issues file periodic reports analogous to current 10Q and 10K reports by Issuers subject to the reporting requirements of the Exchange Act of 1934. Currently Regulation A Issuers are not required to report.

Finally, and what could be the real meat, is that securities sold under the new Regulation A+ are “covered securities”. That is the new Regulation A+ preempts state law.

So is this really a new exemption?

So Issuers under the Regulation A+ will file a registration statement, be preempted from abiding by individual state registration laws, issue free trading shares and thereafter report to the SEC. Other than the test the waters provision, I’m wondering how this new Regulation A+ exemption will be different to my client base of small cap and smaller public companies, than a straight direct public offering (DPO) using Form S-1.

Perhaps the new registration form will be simplified, but smaller companies are already allowed to use simplified disclosures on a Form S-1 (such as two years of audits instead of three and omitting certain financial summaries….). Perhaps the reporting requirements will be simplified, but again, small businesses are already allowed simplified disclosures and the SEC is big on homogenizing forms and reports and for good reason, investors can’t follow the disclosures otherwise, and the point of disclosure is to protect the investing public.

Unlike the crowdfunding or Emerging Growth Company provisions of the JOBS Act, Title IV has only evoked 8 comment letters from the public and other than one from the North American Securities Administration Association (NASAA) they lack any substance whatsoever and the NASAA letter addresses all sections of the JOBS Act not just Regulation A+. Perhaps it is because the entities that are interested in small public offerings (up to $50,000,000) don’t differentiate the new Title IV from existing rules and regulations and the bigger companies simply don’t care.

It is N/A to them.

Until the SEC publishes and enacts this new Regulation A+ we won’t know if it really is a new opportunity or if it will go the same way as the current Regulation A; which isn’t very far.

Attorney Laura Anthony,

Founding Partner, Legal & Compliance, LLC

Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.