Newly adopted exemption to securities registration requirements may offer new capital raising opportunities for developing companies
A company that seeks to raise capital by offering or selling securities to potential investors must either register the offer or sale of securities with the SEC or rely on an exemption to registration. Because the registration process is often cost prohibitive, companies generally rely on an exemption to registration when raising capital. Before the adoption of the recent rules and amendments, only offerings up to $5 million could be exempted under Regulation A. Under Regulation A, issuers had a limited ability to resell the securities within 12 months after the offering and the ability to generally solicit offers from investors who are both accredited and non-accredited. However, the number of issuers using the Regulation A exemption has declined steadily since 1997.1 Instead, many issuers have opted to take advantage of the Regulation D exemption. Though securities issued in reliance on Regulation D are subject to more stringent resale and general solicitation restrictions than Regulation A, the high offering cap and preemption of state law has made it a more viable option for many companies.
Prompted by the Jumpstart Our Business Startups (JOBS) Act, the SEC adopted rules and amendments to Regulation A that became effective June 19, 2015.2 One of the most significant changes was raising the maximum annual offering amount to $50 million, hence the name “Regulation A+.” This exemption is available to most companies organized and principally located in the United States and Canada. However, the following companies, among others, may not avail themselves of Regulation A+:
- companies subject to the reporting requirements of the Securities Exchange Act of 1934;
- investment companies and business development companies;
- certain “bad actor” companies; and
- development stage companies that either have no specific business plan or purpose or have indicated that their business plan is to merge with or acquire an unidentified company or companies.
Companies using Regulation A+ may offer equity securities, debt securities, and securities convertible into equity but may not issue “asset backed securities” defined in Regulation AB.
To qualify for the Regulation A+ exemption, issuers must file an offering statement on Form 1-A with the SEC, which is similar to a registration statement but less burdensome. No fee is required upon filing an offering statement. This form requires basic information about the issuer and offering, completion of an offering circular, and inclusion of certain financial statements, among other requirements. Filings are completed online through EDGAR.
Generally no offer of securities can be made until the issuer has filed an offering statement, and no sale can be made until the offering statement has been qualified by the SEC. However, issuers are permitted to “test the waters” prior to the filing of the offering statement through oral and written communications if certain conditions are satisfied, including the issuer stating that no money is being solicited, no offer to buy the securities can be accepted and no part of the purchase price can be received until the offering statement is qualified, and a person’s indication of interest involves no obligation or commitment of any kind.3
Beyond the basic requirements described above, Regulation A+ offerings are broken into two tiers:
- Tier 1: annual offering may not exceed $20 million; no more than $6 million offered by selling securityholders that are affiliates
- Tier 2: annual offering may not exceed $50 million; no more than $15 million offered by selling securityholders that are affiliates
Tier 1 offerings or Tier 2 offerings where the securities will be listed on a national securities exchange do not have specific investor qualifications. For all other Tier 2 offerings, investors must either be “accredited investors” or limit their investment to no more than 10 percent of the greater of annual income or net worth (for natural persons) or 10 percent of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons).
An issuer that has filed an offering statement that has been qualified must then file an exit report on Form 1-Z no later than 30 calendar days after the completion of the offering. Tier 2 offerings also require ongoing reporting, including annual reports on Form 1-K, semiannual reports on Form 1-SA, and current reports on Form 1-U.
Issuers taking advantage of the new rules under Regulation A should still be cautious of state “blue sky” laws. While offerings under Tier 2 preempt state “blue sky” registration requirements, offerings under Tier 1 are still subject to state “blue sky” requirements in any state where securities are offered. Nevertheless, raising the maximum amount that can be offered under a Regulation A+ offering combined with the ability to resell securities within 12 months (with limitations) and the ability to generally solicit offers to investors (both accredited and non-accredited) may cause companies that generally rely on Regulation D to consider Regulation A+.
1 See GAO, Factors That May Affect Trends in Regulation A Offerings (July, 2012).
2 17 C.F.R. § 230.251 – 230.263
3 17 C.F.R. § 230.255(b)