Regulation A l The Colossal Exemption l Securities Lawyer 101
On December 18, 2013, the Securities and Exchange Commission (“SEC”) voted to propose rules impacting Regulation A . The rules are mandated by the 2012 Jumpstart Our Business Startups Act and designed to encourage investment in smaller companies. Regulation A has rarely been used in recent years, and in 2011, the SEC approved only one Regulation A offering.
The SEC’s proposals have received a lot of attention and created some confusion. As proposed, Regulation A is an existing exemption from registration that allows companies to sell up to $5 million worth of securities within a 12-month period. We expect that many issuers will opt for Regulation A offerings in connection with their going public transactions in the near future as a means of not only raising capital but also obtaining the shareholder base required for a ticker symbol assignment.
When a company offers or sells securities to potential investors in order to raise capital, the company is required under the Securities Act of 1933 to register the offer and sale – unless it can rely on an exemption.
Regulation A requires companies to submit an offering statement that is then reviewed by the SEC. Additionally, offering statements under current Regulation A must comply with requirements regarding form, content, and process. Current Regulation A, however, tailors those requirements for smaller companies and does not mandate ongoing reporting after the offering is completed. Current Regulation A offerings also are subject to state-level registration and qualification requirements.
Regulation A has been used very rarely, and issues have been raised that the cost and complexity of federal and state law compliance make it less practical than other Securities Act exemptions. A GAO Report last year identified this factor and others that may explain why few companies rely on Regulation A.
When Congress passed the JOBS Act, it included a requirement to update and expand the Regulation A exemption to make it more useful for small companies seeking to raise capital. In particular, the JOBS Act directs the Commission to:
♦ Adopt rules that would allow offerings of up to $50 million of securities within a 12-month period.
♦ Require companies to file annual audited financial statements with the SEC.
♦ Adopt additional requirements and conditions that the SEC deems necessary.
The Regulation A Proposals
The SEC’s proposed rules would update and expand the Regulation A exemption by creating the following two tiers of Regulation A offerings:
♦ Tier 1, which would consist of those offerings already covered by Regulation A – namely securities offerings of up to $5 million in a 12-month period, including up to $1.5 million for the account of selling security-holders.
♦ Tier 2, which would consist of securities offerings of up to $50 million in a 12-month period, including up to $15 million for the account of selling security-holders.
For offerings up to $5 million, the company could elect whether to proceed under Tier 1 or 2.
Basic Requirements of the Regulation A Proposals
Under Tier 1 and Tier 2, companies would be subject to basic requirements, including ones addressing issuer eligibility and disclosure that are drawn from the existing provisions of Regulation A. The proposed rules also would update Regulation A to among other things:
♦ Permit companies to submit draft offering statements for nonpublic SEC review prior to filing.
♦ Permit the use of “testing the waters” solicitation materials both before and after filing of the offering statement.
♦ Modernize the qualification, communications, and offering process in Regulation A to reflect analogous provisions of the Securities Act registration process, including requiring electronic filing of offering materials.
Additional Tier 2 Requirements
In addition to these basic requirements, companies conducting Tier 2 offerings would be subject to the following requirements:
♦ Investors would be limited to purchasing no more than 10 percent of the greater of the investor’s annual income or net worth.
♦ The financial statements included in the offering circular would be required to be audited.
♦ The company would be required to file annual and semiannual ongoing reports and current event updates that are similar to the requirements for public company reporting.
Regulation A Eligibility
Regulation A would be available to companies organized in and with their principal place of business in the United States or Canada, as is currently the case under Regulation A.
The exemption would 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 not filed the ongoing reports required by the proposed rules during the preceding two years.
♦ Are or have been subject to a Commission order revoking the company’s registration under the Exchange Act during the preceding five years.
♦ Are disqualified under the proposed “bad actor” disqualification rules.
Preemption of Blue Sky Law
Under current Regulation A, offerings are subject to registration and qualification requirements in the states where the offering is conducted unless a state-level exemption is available. This has been identified by the GAO and market participants as a central factor for the limited use of current Regulation A.
In view of the range of investor protections provided under the proposal, state securities law requirements would be preempted for Tier 2 offerings. The proposal also explores alternative approaches to addressing this matter, including the coordinated review program proposed by the North American Securities Administrators Association.
For more information about the JOBS Act please visit For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information about going public and the rules and regulations affecting the use of Rule 144, Form 8K, crowdfunding, FINRA Rule 6490, Rule 506 private placement offerings and memorandums, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration statements on Form S-1 , IPO’s, OTC Pink Sheet listings, Form 10 OTCBB and OTC Markets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, direct public offerings and direct public offerings please contact Hamilton and Associates at (561) 416-8956 or [email protected]. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
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