Disclosure Obligations in Regulation A+ Offerings
The Anti-Fraud Provisions And Regulation A+
On March 25, 2015, the Securities and Exchange Commission adopted final rules amending Regulation A. The new rules are often referred to as Regulation A+. These rules are designed to facilitate smaller companies’ access to capital. Regulation A+’s new rules provide investors with more investment choices and issuers with more capital raising options during their going public transactions. The rules adopting Regulation A+ are mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act.
Regulation A+ can be used in combination with direct public offerings and initial public offerings as part of a Going Public Transaction. The exemption simplifies the process of obtaining the seed stockholders required by the Financial Industry Regulatory Authority while allowing the issuer to raise initial capital.
Form 1- A sets forth line item disclosures that must be provided in Regulation A+ offerings. These line item disclosures are the minimum disclosures required. In addition to these line item disclosures, the anti-fraud provisions mandate disclosure of certain information to investors. Section 10(b) of the Securities Exchange Act of 1934, (the “Exchange Act”) prohibits the use of any manipulative or deceptive device in contravention of the Securities & Exchange Commission’s rules and regulations. Rule 10b-5, was adopted pursuant to Section 10(b), and prohibits fraudulent devices and schemes, material misstatements and omissions of any material facts, and acts and practices that operate as a fraud or deceit on any person in connection with the purchase or sale of a security.
This means that each participant in a company’s offering, including the company, itself and its officers, directors, consultants, advisors, underwriters, accountants and others are potentially liable under this provision. Section 20(a) of the Exchange Act imposes liability on any person who directly or indirectly controls any person liable under Section 10(b) or Rule 10b-5, to the same extent as the controlled person. Persons conducting Regulation A+ Offerings can mitigate their risk exposure by completing a comprehensive due diligence review and making appropriate disclosures to investors.
Planning Ahead for Due Diligence in a Regulation A+ Offering
The Company and its securities lawyers and accountants should agree upon a strategy for review. The Company’s securities attorney should identify any issues that could affect the company’s ability to complete the offering documents within the timeframe desired. Each due diligence investigation should be customized to the particular facts surrounding the company, its business and its Regulation A+ offering. While a checklist may be useful, it is only a starting point for a Regulation A+ due diligence review and more often than not, additional documents are necessary to complete a comprehensive review and prepare the disclosures required.
Companies should be prepared to provide the following documents and expect a review of such matters by the issuer’s Regulation A+ attorney:
- Material Agreements,
- Prior Securities Offerings,
- Corporate Records including Articles, Bylaws, Resolutions and Minutes,
- Shareholder Records,
- Shareholder Information,
- Financial Information,
- Shareholder Voting Records,
- Corporate Records,
- Management Agreements, Biographies, Background & Compensation,
- Contracts with Customers,
- Contracts with Suppliers,
- Contracts with Manufacturers,
- Marketing Plans,
- Tangible and Intangible Assets,
- Intellectual Property,
- Impact of Environmental Laws,
- Investor Relations Providers,
- Litigation Involving the Company,
- Insurance coverage, and
In addition to the items above, management should ensure that it has evaluated whether the bad actor rules apply to the company’s Regulation A+ offering which could impact its ability to use Regulation A+ for its offering. Planning ahead will help ensure a smooth and effective Regulation A+ offering in a timely and efficient manner.
For further information about Regulation A+ or this securities law blog, 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 advice on any specific matter, nor does this message create an attorney-client relationship. 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
Facsimile: (561) 416-2855