Authored by: Sarah D’Amore
On March 25, 2015, the Securities and Exchange Commission (SEC) adopted final rules referred to as Regulation A+ that make raising capital more accessible to smaller nonpublic companies.[1] The new rules will not only provide growing companies with greater access to capital, they will also increase opportunities for investors. The rules were published in the Federal Register on April 20, 2015 and took effect on June 19, 2015.
The new rules have been adopted as required by Title IV of the Jumpstart Our Business Startups (JOBS) Act. President Barack Obama signed the JOBS Act into law on April 5, 2012 which requires the SEC to promulgate rules addressing capital formation, disclosure and registration requirements.[2]
The March 25, 2015 rules amend the current Regulation A which provides smaller issuers of securities with an exemption from registration under the Securities Act of 1933. The existing Regulation A has not been widely used in recent years due to a low dollar threshold for offerings, burdensome disclosure requirements and state securities regulations.
Two Tier Structure for Offering and Selling Securities
Regulation A+ allows smaller companies to offer and sell securities under a framework comprised of two tiers of offerings. Tier 1 and Tier 2, the new categories of offerings, allow smaller companies to sell, in a twelve month period, up to $50 million worth of securities. Tier 1 offerings permit a company to offer and sell up to $20 million of securities in a twelve month period. Tier 2 offerings permit a company to offer and sell up to $50 million of securities in a twelve month period. Companies may elect to conduct an offering under either tier when making an offering up to the $20 million threshold.
Eligibility
Non-public companies organized in and maintaining their principal place of business in the United States or Canada may use Regulation A+. However,
the exemption is not available to (1) a company that is currently an SEC-reporting company; (2) certain investment companies; (3) a company with no specific business plan or purpose or that is intending to merge with or acquire an unidentified company; (4) offerings for asset-backed securities; (5) offerings for fractional undivided interests in oil, gas or other mineral rights; (6) companies that failed, in the two years prior to the filing of a new offering statement, to file ongoing reports required by Regulation A; (7) a company that, pursuant to Exchange Act Section 12(j), had their registration revoked within the five years preceding the filing of an offering statement; and (8) disqualified “bad actors.”
Limitations and Reporting Requirements
Of the $20 million permitted in a Tier 1 offering, Regulation A+ imposes a $6 million cap on the amount of secondary sales by affiliates of a company. The new rules similarly impose a $15 million cap in Tier 2 offerings. In either Tier, secondary sales are collectively capped at thirty percent (30%) of an offering in both an initial offering and any Regulation A offering occurring in the twelve months immediately after the initial offering. In addition, in a Tier 2 offering under Regulation A+ non-accredited investors may only purchase shares in an amount equivalent to ten percent (10%) of their annual income or net worth, whichever is greater.
Under Regulation A+, both tiers will be subject to some basic reporting and disclosure requirements but additional ongoing reporting requirements will apply to Tier 2 offerings. Tier 2 offerings will also require companies to disclose audited financial statements and file with the SEC annual, semi-annual, and current reports similar to Form 10-K, Form 10-Q, and Form 8-K required by publicly-held companies. For Tier 2 offerings, the new rules preempt state securities laws relevant to registration and qualification requirements. Conversely, federal and state registration and qualification requirements will continue to apply to offerings made pursuant to Tier 1. For Tier 1 offerings subject to such requirements, companies may avail themselves of the North American Securities Administrators Association (NASAA) coordinated review program.
Benefits of a Regulation A+ Offering
Regulation A+ provides a viable method, likely superior to the current Regulation A, for emerging nonpublic companies to raise large amounts of capital without having to go public or, in Tier 2 offerings, avoid the regulatory and financial burden of state securities laws. The new rules will enable companies to pursue meaningful growth by raising the $5 million ceiling under current Regulation A to $50 million. For those companies considering the path to becoming a publicly held company, Tier 1 or 2 offerings will provide an intermediate stage for capital formation prior to going public.
[1] SEC Adopts Rules to Facilitate Smaller Companies’ Access to Capital, New Rules Provide Investors With More Investment Choices, SEC.gov, http://www.sec.gov/news/pressrelease/2015-49.html (March 25, 2015).
[2] See Jumpstart Our Business Startups (JOBS) Act, SEC.gov, https://www.sec.gov/spotlight/jobs-act.shtml (last visited April 15, 2015).