SEC Adopts Final Rules for “Regulation A+”April 9, 2015
On March 25, 2015, following the mandate of Title IV of the Jumpstart Our Business Startups Act (JOBS Act), the Securities and Exchange Commission (SEC) adopted final rules that update and expand Regulation A, which provides an exemption from registration for private issuers of securities offerings. Issuers have seldom used the existing Regulation A, which practitioners criticize as being too small, too costly, and too bureaucratic.
The updated Regulation A, called “Regulation A+” by the securities industry, establishes two tiers of qualified offerings. Tier 1 permits offerings of up to $20 million in a 12-month period, while Tier 2 permits offerings of up to $50 million in a 12-month period. Both tiers permit companies to sell securities to non-accredited investors up to 10% thresholds (of its net worth or net income, whichever is greater). Both tiers require the preparation and SEC filing of a formal offering statement—but allow the issuer to submit draft offering statements for non-public review by SEC staff and permit the continued use of solicitation materials after filing the offering statement. Tier 1 limits offers by selling security-holders that are affiliates of the issuer to $6 million. For Tier 2, the limit is $15 million.
Issuers must be businesses organized in the United States or Canada and have a principal place of business there. Several types of issuers are not eligible: companies registered under the Securities Exchange Act of 1934; investment companies; business development companies; blank check companies; issuers of fractional interests in oil, gas, and mineral rights; and companies or their principals who have certain disqualifying situations.
In a major shift from the former Regulation A, the final rules preempt state securities laws and qualification requirements for securities offered or sold to “qualified purchasers” in Tier 2 offerings. However, issuers of Tier 2 offerings must:
- provide two years of audited financial statements in their offering circulars to investors;
- file annual, semiannual, and current event reports with the SEC; and
- limit the amount of securities that non-accredited investors can purchase, to no more than 10 percent of the greater of the investor’s annual income or net worth.
Unlike Tier 2 offerings, Tier 1 offerings remain subject to state “Blue Sky” registration and qualification requirements.
Regulation A+ becomes effective 60 days after publication in the Federal Register. The SEC hopes that Regulation A+ will open up and encourage greater capital-raising by smaller companies and will offer investors more choices. However, it is unclear whether the new rules, with required disclosures and review by the SEC, along with ongoing filing requirements, will be attractive alternatives to the offering alternatives currently available to issuers.
The final rules on Regulation A+ include other eligibility requirements and details. For any questions or greater clarity on the final rules, please contact the Hinckley Allen attorney with whom you regularly work.