On March 25th, the Securities and Exchange Commission (the “SEC”) adopted new rules to amend Regulation A under the Securities Act of 1933, as amended (the “Securities Act”). The new rules, referred to as “Regulation A+,” were mandated by Title IV of the Jumpstart Our Business Startup (“JOBS”) Act with the goal of increasing access to the capital markets for smaller issuers. The adopting release for the Regulation A+ rules is available at http://www.sec.gov/rules/final/2015/33-9741.pdf.
Regulation A+ expands upon and modernizes the existing Regulation A. To date, Regulation A has been little used due to its limited offering size (up to $5 million of securities in a 12-month period) and the disclosure burdens it imposes relative to other private placement exemptions, such as Regulation D. Regulation A+, however, may provide a meaningful new tool for private issuers wishing to access the capital markets.
Regulation A+ creates two tiers of exempt offerings:
- Tier 1 consists of exempt offerings of up to $20 million in a 12-month period, including not more than $6 million in offers by selling securityholders that are affiliates of the issuer; and
- Tier 2 consists of exempt offerings of up to $50 million in a 12-month period, including not more than $15 million in offers by selling securityholders that are affiliates of the issuer.
Selling security holders are also limited to 30% of the aggregate offering price in the issuer’s first Regulation A+ offering and in subsequent offerings during the first year following the issuer’s initial qualification. This limitation will permit selling securityholders to gain liquidity during this time, but requires that sales be made in conjunction with the issuer raising new capital. Following the initial 12-month period, there are no limits on non-affiliate selling securityholders, except for the maximum limits of Regulation A+. Sales by the issuer and all selling securityholders are aggregated for purposes of calculating the maximum offering amounts.
An issuer may elect to proceed under Tier 1 or Tier 2, but offerings under Tier 2 will be subject to additional requirements, as described below.
The new rules:
- permit issuers to “test-the-waters” with the general public either before or after the filing of the offering statement, in order to determine interest in a proposed offering;
- permit certain continuous offerings, such as offerings by selling shareholders, securities issued upon exercise of outstanding options, warrants, or rights and continuous offerings by an issuer that are commenced within two days of qualification, but do not permit delayed offerings by an issuer or at the market offerings;
- permit issuers to qualify additional securities by filing a post-qualification amendment to a qualified offering statement; and
- permit the non-public submission of offering statements and amendments for review by the SEC before publically filing such documents.
Securities issued under the new rules are not subject to restrictions on transfer imposed by federal securities laws.
Issuers relying on Tier 2 of Regulation A+ are required to provide ongoing disclosure under new forms, but are not subject to the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Regulation A+ issuers are not subject to the Sarbanes-Oxley Act of 2002, the SEC proxy rules, SEC tender offer or “going private” rules, short-swing profit rules or beneficial ownership reporting, among other requirements of the Exchange Act.
Regulation A+ is available only to U.S. and Canadian companies that have their principal place of business in the United States or Canada. The exemption is not available to certain types of issuers, including issuers that are already SEC reporting issuers, investment companies and “blank check” companies, as well as those offerings involving participants subject to “bad actor” disqualification. Development stage companies with a specific plan or purpose are eligible issuers.
Regulation A+ limits the amount of securities that an investor who is not an accredited investor may purchase in a Tier 2 offering. Non-accredited investors may acquire up to (i) 10% of the greater of annual income or net worth (for natural persons); or (ii) 10% of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons). Importantly, however, the new rules do not impose a duty of investigation upon the issuer. While issuers must make investors aware of the investment limitations, they are entitled to rely upon an investor’s representation, unless the issuer knows the representation is false. Similarly, issuers may also rely on representations of investor compliance with the investment limitations from participating broker-dealers, unless the issuer knew at the time of sale that any such representation was untrue.
Definitions of income and net worth are calculated in the manner required by Rule 501 of Regulation D. Under those rules, a person’s primary residence is not included as an asset.
Regulation A+ offerings are made pursuant to offering statements on Form 1-A, which are filed with the SEC electronically on the EDGAR system. Form 1-A requires an offering circular that includes basic information about the issuer and the offering, including financial statements, and requires the filing of certain key documents as exhibits.
The offering circular requires a simplified form of narrative disclosure about the issuer and its business, similar in content to, but simpler than, the smaller reporting issuer disclosure requirements applicable to registered offerings. For example, Form 1-A executive compensation disclosure is greatly simplified compared to disclosure in a registered offering.
Form 1-A filings are subject to SEC review and comment, and SEC review is required to be completed prior to “qualification” of the offering. As in registered offerings, the SEC will provide notice of qualification to an issuer when it has completed its review of the offering circular. The new rules also incorporate a confidential submission process, similar to that available to emerging growth companies relying on the JOBS Act, so that the SEC review can be completed before the filing is made public.
Under the new rules, issuers that elect to list securities offered pursuant to a Tier 2 offering on a national securities exchange or that seek to register such securities under the Exchange Act may do so by filing a Form 8-A (short form) registration statement with the SEC and thereafter become subject to the reporting requirements of section 13 or 15(d) of the Exchange Act. In such circumstances, an issuer will be required to comply with the form requirements of Form 8-A, which will generally allow issuers to incorporate by reference in the form information provided in the related Form 1-A if the issuer has provided disclosure in the Form 1-A that follows the disclosure required in Part 1 of Form S-1.
Regulation A previously required financial statements consisting of a balance sheet, dated as of the end of the most recent fiscal year (or as of the most recent interim period in certain cases), statements of income, cash flows and equity for each of the two most recent fiscal years, and for any interim period, as well as financial statements of significant acquired businesses and related pro forma information. Previously, financial statements were not required to be audited, unless the issuer had obtained an audit for other purposes.
Financial statements that comply with the previous Regulation A requirements continue to be sufficient for Tier 1 offerings under Regulation A+. Under the new rules, in a Tier 2 offering, issuers must file balance sheets as of the two most recent fiscal years, in addition to the other financial statements required for Tier 1 offerings. Further, all annual financial statements must be audited in a Tier 2 offering. For U.S. issuers, financial statements must be prepared in accordance with U.S. GAAP, while financial statements of Canadian issuers may be prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
Ongoing Reporting Requirements
One of the most significant aspects of the new rules is the creation of an ongoing reporting system for issuers that rely upon Tier 2 of Regulation A+. Issuers relying on Tier 2 do not have a class of securities registered under Section 13 or 15 of the Exchange Act and are not subject to the ongoing reporting requirements of the Exchange Act.
If Tier 2 issuers do not voluntarily register under the Exchange Act, they are required to file annual reports on a new Form 1-K, semiannual updates on a new Form 1-SA and current reports on a new Form 1-U. These reports are simplified versions of Forms 10-K, 10-Q and 8-K and based on the informational requirements of Form 1-A. The reports are required to be filed via EDGAR 120 days after the fiscal year-end, in the case of Form 1-K, 90 days after the end of the second fiscal quarter, in the case of Form 1-SA, and within four business days of the relevant event, in the case of Form 1-U. Issuers 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 was required to file such reports) to remain eligible to conduct offerings pursuant to the rules.
Under the new rules, the duty to file these reports may be suspended with respect to any class of securities held of record by fewer than 300 persons, or fewer than 1,200 persons for banks or bank holding companies, where offers or sales made in reliance on a qualified Tier 2 offering statement are not ongoing.
Continuous or Delayed Offerings
Regulation A+ allows for certain types of continuous offerings, such as for offerings offered or sold on behalf of selling security holders; securities offered under employee benefit plans; securities pledged as collateral; securities issued upon conversion of other outstanding securities or upon the exercise of options, warrants, or rights; or securities that are part of an offering which commences within two calendar days after the qualification date, will be offered on an 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 a period of two years from the initial qualification date.
The new rules condition the ability of an issuer to sell securities in a continuous offering on being current in its annual and semiannual report filing, if required under Rule 257(b), at the time of sale. The new rules permit incorporation by reference of existing filings and permit offering circular supplements to be used for final pricing information, where the offering statement is qualified on the basis of a bona fide price range estimate. Additionally, the new rules permit offering circulars to omit information with respect to the underwriting syndicate analogous to the provisions for registered offerings under Rule 430A. However, the new rules do not allow an issuer to omit the amount of securities (the number of equity securities or aggregate principal amount of debt securities) to be offered.
At the market offerings and delayed offerings “off the shelf,” as permitted by Forms S-3 and F-3, are not permitted by Regulation A+.
Regulation A+ includes provisions designed to facilitate the development of secondary trading markets for securities issued in connection with Tier 2 offerings. Brokers are permitted to rely upon information contained in reports filed by Regulation A+ issuers to satisfy the broker’s obligations under Exchange Act Rule 15c2-11 with respect to publishing quotations on such issuer’s securities. Lastly, an issuer that is current in its semiannual reporting required under the rules and voluntarily provides quarterly financial statements on Form 1-U is deemed to have provided reasonably current and adequate current public information for the entirety of such year for the purpose of permitting resales of restricted securities under Rule 144.
As is the case for offerings under the current Regulation A, offerings under the new rules continue to be subject to the liability provisions of Section 12(a)(2) of the Securities Act, which prohibit an offer or sale of a security by means of an offering circular or oral communication that includes a material misleading statement or material misstatement of fact.
Blue Sky Preemption
The JOBS Act authorized the SEC to preempt state regulation of Regulation A+ offerings by adopting a definition of “qualified purchasers” in such offerings with respect to whom state blue sky laws are preempted. Under the new rules, state securities law registration and qualification requirements are preempted in the case of Tier 2 offerings by defining “qualified purchasers” as all offerees and all purchasers in a Tier 2 offering. Because an offering of any size up to $50 million may rely upon Tier 2, under the new rules issuers have the ability to determine whether offerings are subject to state blue sky review. Tier 1 offerings are subject to state registration and qualification requirements, and issuers are able to take advantage of the coordinated review program developed by the North American Securities Administrators Association.
Regulation A+ has the potential to enhance the ability of U.S. companies to access capital markets. We expect that Tier 2 offerings, in particular, may be useful as a “bridge” to full reporting status and listing on a U.S. stock exchange. With the increased offering size and combination of public offering and private placement features, certain growth companies may benefit from increased access to capital at a lower cost than previously available.
Regulation A+ may also provide increased flexibility and reduced cost for U.S. companies that wish to list their securities on stock exchanges outside the United States. Because existing alternatives often made it costly and difficult for U.S. private companies to list directly on foreign exchanges, certain U.S. companies have found it difficult to access growth-company oriented exchanges outside the United States. Similarly, Canadian growth companies that seek to extend offerings into the United States may find Regulation A+ to provide an attractive alternative to a fully registered offering or a concurrent Regulation D private placement.
The new rules will be effective 60 days after publication in the Federal Register.