Congress enacted the JOBS Act in 2012 with the purpose of assisting small businesses and boosting job creation. Section 401 of the JOBS Act directed the Securities and Exchange Commission to adopt rules exempting offerings of up to $50 million of securities annually from the registration requirements of the Securities Act of 1933 (the Securities Act). On March 25, 2015 the SEC adopted final rules amending Regulation A under the Securities Act by expanding and updating the exemption from registration under existing Regulation A. The following is a summary of the key aspects of the final rules, which go into effect June 19, 2015.
The expanded exemptions provided by amended Regulation A, also known as "Regulation A+," are only available to companies organized and with their principal place of business in the United States or Canada.
Additionally, such companies must:
- Have filed all required ongoing reports under Regulation A+ during the two years immediately preceding the filing of a new offering statement (or for such shorter period that the issuer has been required to file such reports); and
- Not be subject to an order by the SEC for failure to comply with any provisions of the Securities Exchange Act of 1934 (the Exchange Act) entered within the five-year period immediately preceding the filing of an offering statement pursuant to Section 12(j) of the Exchange Act.
In addition to being an eligible issuer, the securities offered must also be eligible. Regulation A+ limits eligible securities to those specifically listed in Section 3(b)(3) of the Securities Act, which includes warrants and convertible equity securities, among other equity and debt securities. Asset-backed securities are specifically excluded from Regulation A+.
Offering and Secondary Sales Limitations
Regulation A+ divides the exemption from registration into two tiers:
- Tier 1 offerings consist of securities offerings of up to $20 million in a 12-month period (including no more than $6 million on behalf of selling security holders that are affiliates of the issuer).
- Tier 2 offerings consist of securities offerings of up to $50 million in a 12-month period (including no more than $15 million on behalf of selling security holders that are affiliates of the issuer).
An issuer of $20 million or less of securities may elect to proceed under either Tier 1 or Tier 2.
The final rules also limit the amount of securities that selling security holders (both affiliates and non-affiliates) can sell within the first 12-month period following the date of qualification of an initial Regulation A+ offering to no more than 30% of the aggregate offering price.
Regulation A+ imposes investment limitations for purchasers of Tier 2 offerings to no more than 10% of the greater of annual income or net worth (for a natural person) or the greater of annual revenue or net assets at fiscal year-end (for a non-natural person). However, these limitations do not apply to a purchaser who qualifies as an accredited investor under Rule 501 of Regulation D or to the sale of securities that will be listed on a national securities exchange upon qualification.
Integration Safe Harbor
The final rules preserve the integration safe harbor provisions of existing Regulation A, with the exception of security-based crowdfunding transactions conducted pursuant to Section 4(a)(6) of the Securities Act. Therefore, Regulation A+ offerings will not be integrated with:
- Prior offers or sales of securities; or
- Subsequent offers and sales of securities that are:
- Registered under the Securities Act, except indications of interest under Rule 255(c);
- Made pursuant to an exempt offering pursuant to a compensatory benefit plan or contract under Rule 701 under the Securities Act;
- Made pursuant to an employee benefit plan;
- Made outside of the U.S. pursuant to Regulation S;
- Made pursuant to Section 4(a)(6) of the Securities Act; or
- Made more than six months after completion of the Regulation A+ offering.
Conditional Exemption under Section 12(g)
Regulation A+ exempts Tier 2 offerings from registration requirements of Section 12(g) of the Exchange Act so 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 pursuant to Section 17A of the Exchange Act; and
- Has either:
- A public float of less than $75 million (determined as of the last business day of its most recently completed semiannual period); or
- In the absence of a public float, annual revenues of less than $50 million (as of the most recently completed fiscal year).
Issuers that do not meet these requirements and exceed the threshold for Section 12(g) will be granted a two-year transition period before being required to register its class of securities pursuant to Section 12(g) so long as the issuer timely files all ongoing reports due pursuant to Rule 257 during such period.
Filing Requirements and Ongoing Reports
Electronic filing via EDGAR is required for offering statements and any other required filings submitted under Regulation A+. Delivery requirements of Regulation A+ may be satisfied by filing such items via EDGAR. Issuers may also submit a non-public draft of the offering statement to the SEC for review as long as the offering statement, including such non-public materials, is actually filed not later than 21 calendar days before qualification.
Regulation A+ requires Tier 1 and Tier 2 issuers to submit financial statements for the two most recently completed fiscal year-end dates. The offering statement must include financial statements dated no more than nine months before the date of non-public submission, filing or qualification, with the most recent annual or interim balance sheet not older than nine months. Tier 1 issuers may file unaudited financial statements so long as they have not already obtained audited financial statements for another purpose; however, financial statements of Tier 2 issuers must be audited.
Additionally, Tier 2 issuers are subject to ongoing reporting obligations, including:
- Annual reports on Form 1-K;
- Semi-annual reports on Form 1-SA; and
- Current event reports on Form 1-U.
Such reporting requirements for Tier 2 issuers continue until the reporting obligations are either suspended or the issuer becomes subject to the Exchange Act's periodic reporting requirements. In addition, Tier 2 reporting requirements will satisfy the information requirement that a broker-dealer must review before publishing a quotation.
Both Tier 1 and Tier 2 issuers must also file a Form 1-Z exit report within 30 days after the completion or termination of the Regulation A+ offering containing certain information such as the date that the offering commenced, the total amount of securities sold, the price of such securities, the net proceeds to the issuer and similar information.
Issuers and intermediaries in the prequalification period must deliver a preliminary offering circular to prospective purchasers at least 48 hours before any sale under Regulation A+ unless the issuer is subject to, and current in, Tier 2 ongoing reporting obligations. However, in such instances, issuers and intermediaries will otherwise remain subject to the general delivery requirements of the rules, including compliance with Rule 251(d)(1) offers and for including a preliminary offering circular in any solicitation materials used after filing the offering statement with the SEC pursuant to Rule 255.
Qualification and Withdrawal
Prior to any sale in an offering under Regulation A+, and to be effective, the offering statement must be qualified by the SEC. The SEC staff will have the opportunity to review and comment on offering statements before they are qualified. A notice of qualification issued by the Division of Corporation Finance will serve as a notice of effectiveness, and, after such notice is received, the offering statement is considered qualified.
An issuer may withdraw an offering statement if none of the securities subject to the offering statement have been sold and such offering statement is not subject to a temporary suspension order issued by the SEC, but only with the consent of the Director of the Division of Corporation Finance.
Continuous or Delayed Offerings
Regulation A+ permits continuous or delayed offerings; however, issuers in continuous or delayed Tier 2 offerings must be current in their Regulation A+ annual and semiannual reporting obligations. Permitted continuous or delayed offerings for both Tier 1 and Tier 2 include:
- Securities offered or sold by or on behalf of a person other than (i) the issuer, (ii) its subsidiaries, or (iii) a person of which the issuer is a subsidiary;
- Securities offered and sold pursuant to (i) a dividend or interest reinvestment plan or (ii) an employee benefit plan;
- Securities issued upon the exercise of outstanding options, warrants, or rights;
- Securities issued upon conversion of other outstanding securities;
- Securities pledged as collateral; and
- Securities that are part of an offering which commences within two calendar days after the qualification date, will be offered on a continuous basis, may continue to be offered for a period in excess of 30 days from the date of initial qualification, and will be offered in an amount that, at the time the offering statement is qualified, is reasonably expected to be offered and sold within two years from the initial qualification date. This is similar to a registered shelf offering.
Issuers may also qualify additional securities in reliance on Regulation A+ by filing a post-qualified amendment to a qualified offering statement.
Testing the Waters
Regulation A+ also allows issuers to "test the waters" with the general public, either before or after the filing of the offering statement. Any solicitation materials used after publicly filing the offering statement must be preceded or accompanied by a preliminary offering circular or contain a notice informing potential investors where and how the most current preliminary offering circular can be obtained.
Not later than two business days after the completion of a sale, the issuer must provide purchasers with a copy of the final offering circular or a notice with the URL where the final offering circular may be obtained on EDGAR along with contact information for where a purchaser can request a final offering circular.
Bad Actor Disqualification
The final rules seek to align the bad actor disqualification provisions of Regulation A+ with similar provisions in Rule 506(d) and thus covered persons and triggering events are substantially the same as those included in Rule 506(d). "Covered persons" therefore include managing members of limited liability companies, compensated solicitors of investors, underwriters, executive officers and other officers participating in the offering, and beneficial owners of 20% or more of the issuer's outstanding voting equity securities (calculated on the basis of voting power). Additionally, Regulation A+ added two disqualification triggers: (1) final orders and bars of certain state and other federal regulators and (2) SEC cease-and-desist orders relating to violations of scienter-based anti-fraud provisions of the federal securities laws or Section 5 of the Securities Act.
These provisions of Regulation A+ generally disqualify securities offerings from reliance on Regulation A+ (or may require the issuer to make additional disclosures) if the issuer or covered persons have experienced a disqualification trigger. However, an issuer does not lose the benefit of Regulation A+ if it can show it did not know, and in the exercise of reasonable care could not have known, of the existence of a disqualification.
State Securities Laws
Regulation A+ does not provide for preemption of any state securities laws requiring registration and qualification for Tier 1 offerings but does provide for such preemption for Tier 2 offerings. Therefore, Tier 1 offerings will be required to comply with applicable state registration and review requirements. This requirement may significantly affect the utility of Tier 1 offerings.
If you have any questions, please contact the Venable attorney with whom you work, one of the authors of this alert, or a member of Venable's Corporate Finance and Securities Team.