Last month, the Securities and Exchange Commission (the “SEC”) proposed amendments to Regulation A under the Securities Act of 1933, as amended (the “Securities Act”), to expand the Regulation A exemption to permit offerings of up to $50 million in a 12-month period, in addition to offerings of up to $5 million in a 12-month period already permitted by Regulation A.1 The amendments to Regulation A are mandated by Title IV of the Jumpstart Our Business Startup (JOBS) Act (the “JOBS Act”) with the goal of increasing access to capital for smaller companies by addressing challenges perceived in using Regulation A. The rule proposals are now subject to a 60-day comment period.
Current Regulation A permits unregistered public offerings by companies in the United States and Canada of up to $5 million of securities in a 12-month period, including no more than $1.5 million by security-holders of the offering company. The current regulation requires offering companies to submit an offering statement reviewed by SEC staff. Offering companies must also comply with state-level registration and qualification requirements, the interplay of which can be complicated and therefore costly, one factor identified by a GAO Report last year as a reason why few companies rely on Regulation A.2
The proposed amendments would create two tiers for Regulation A offerings:
- Tier 1 would consist of offerings already covered by Regulation A up to $5 million in a 12-month period, including up to $1.5 million for the account of selling security-holders.
- Tier 2 would consist of offerings up to $50 million in a 12-month period, including up to $15 million for the account of selling security-holders.
Under both tiers, the proposed rules would update the basic requirements of Regulation A to (i) permit offering companies to submit draft offering statements for nonpublic SEC review, (ii) permit “testing the waters” with solicitation materials before and after filing the offering statement and (iii) reflect modernization of SEC rules, including electronic filing of offering statements on an updated Form 1-A, which would include a notice similar to Form D used for Regulation D offerings under the Securities Act, as well as an offering circular (similar to a prospectus) and financial statements and exhibits. The exemption would not be available to certain companies, including companies that are already SEC reporting companies, certain investment companies and those disqualified under proposed “bad actor” disqualification rules. Regulation A offerings would continue to be subject to SEC staff review.
Additional requirements would apply to tier 2 offerings, including a limitation on investors of 10% of the greater of the investor’s annual income or net worth and requiring audited financial statements3 in the offering circular and filing of annual and semiannual ongoing reports and current event updates similar to public company filings.
Significantly, the proposed amendments would also provide that state securities law requirements would be preempted for offerings to “qualified purchasers,” which is defined as all offerees of securities in a Regulation A offering and all purchasers in a Tier 2 offering. The proposed amendments also discuss alternatives to preemption, including the opposition of the North American Securities Administrators Association (“NASAA”) to preemption in light of recent state efforts to establish a multi-state review process for offerings under Section 3(b)(2) of the Securities Act.4
1 See http://www.sec.gov/rules/proposed/2013/33-9497.pdf. See also “SEC Proposes Rules to Increase Access to Capital for Smaller Companies” (December 18, 2013)
3 Tier 1 offerings would require financial statements that need not be audited unless the issuer’s financial statements were audited for other purposes.
We will continue to monitor the SEC’s Regulation A rulemaking. If you have any questions regarding the proposed amendments or Regulation A, please contact the Womble Carlyle attorney with whom you usually work or one of our Corporate and Securities attorneys.
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