SEC Adopts Final Rules for New Regulation A+ Exemption

Regulation A is long-standing, albeit relatively little used, exemption from the registration requirements of the Securities Act of 1933 that allows qualified issuers to offer and sell up to $5 million of securities in any 12-month period, including no more than $1.5 million of securities offered by security-holders of the company, provided that certain relatively complex disclosure requirements are satisfied.  Title IV of the JOBS Act included a mandate to the SEC to promulgate a rule or regulation that would add a class of securities to the securities exempted from registration pursuant to § 3(b) of the Securities Act.  The SEC adopted the final rules for this exemption, which appear as § 3(b)(2) of the Securities Act (15 U.S.C.A. 77c(b)(2)) and is often referred to as “Regulation A+” on March 25, 2015 (to become effective 60 days after publication in the Federal Register).  The final rules for Regulation A+ provide for two tiers of offerings: 

  • Tier 1, which would consist of securities offerings of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer.
  • Tier 2, which would consist of securities offerings of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer.

In addition to the limits on secondary sales by affiliates, the rules also limit sales by all selling security-holders to no more than 30 percent of a particular offering in the issuer’s initial Regulation A offering and subsequent Regulation A offerings for the first 12 months following the initial offering.

For offerings of up to $20 million, the issuer can elect whether to proceed under Tier 1 or Tier 2.  Both tiers would be subject to basic requirements as to issuer eligibility, disclosure, and other matters, drawn from the provisions of Regulation A.  Both tiers would also permit companies to submit draft offering statements for non‑public review by SEC staff before filing, permit the continued use of solicitation materials after filing the offering statement, require the electronic filing of offering materials and otherwise align Regulation A with current practice for registered offerings.

In addition to these basic requirements, companies conducting Tier 2 offerings would be subject to other requirements, including: a requirement to provide audited financial statements; a requirement to file annual, semiannual and current event reports; and a limitation on the amount of securities non-accredited investors can purchase in a Tier 2 offering of no more than 10 percent of the greater of the investor’s annual income or net worth.

Eligibility for the Regulation A+ is limited to companies organized in and with their principal place of business in the United States or Canada.  The exemption is not be available to companies that:

  • Are already SEC reporting companies and certain investment companies.
  • Have no specific business plan or purpose or have indicated their business plan is to engage in a merger or acquisition with an unidentified company.
  • Are seeking to offer and sell asset-backed securities or fractional undivided interests in oil, gas or other mineral rights.
  • Have been subject to any order of the Commission under Exchange Act Section 12(j) entered within the past five years.
  • Have not filed ongoing reports required by the rules during the preceding two years.
  • Are disqualified under the “bad actor” disqualification rules.

The rules exempt securities in a Tier 2 offering from the mandatory registration requirements of Exchange Act Section 12(g) if the issuer meets all of the following conditions:

  • Engages services from a transfer agent registered with the Commission.
  • Remains subject to a Tier 2 reporting obligation.
  • Is current in its annual and semiannual reporting at fiscal year-end.
  • Has a public float of less than $75 million as of the last business day of its most recently completed semiannual period, or, in the absence of a public float, had annual revenues of less than $50 million as of its most recently completed fiscal year. 

An issuer that exceeds the dollar and Section 12(g) registration thresholds would have a two-year transition period before it must register its class of securities, provided it timely files all of its ongoing reports required under Regulation A. 

In light of the total package of investor protections included in amended Regulation A, the rules provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers,” defined to be any person to whom securities are offered or sold under a Tier 2 offering.

For further discussion, log on to Westlaw Next and search for § 151:187 of Business Transactions Solutions.

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s