SEC proposes new Regulation A+

On December 18, 2013, the Securities and Exchange Commission issued a release proposing new rules for the purpose of implementing Section 401 of the Jumpstart Our Business Startups Act, or JOBS Act for short.  It amends and greatly expands current Regulation A, which exempts from SEC registration offerings of securities of up to $5 million within a 12-month period; hence its nickname Regulation A+.  For all you intrepid readers of regulatory promulgating literature, click here for the SEC release in all its 387 page glory.  Following is a short summary of the background and the main features of the proposed rule.

By enacting the JOBS Act, Congress sought to enable smaller companies to raise capital without the burdensome registration requirements of the federal and state securities laws.  Section 401 of the JOBS Act added a new Section 3(b)(2) to the Securities Act of 1933, which directs the SEC to adopt rules exempting offerings of up to $50 million of securities annually from the registration requirements of the Securities Act.  The near worthlessness of the existing Regulation A exemption is illustrated by the SEC's observation in the release that from 2009 through the end of 2012 there had been 19 qualified offerings under the rule for a total offering amount of approximately $73 million.  By contrast, during the same period more than 27,000 offerings of up to $5 million each claiming other exemptions were conducted for a total offering amount of approximately $25 billion. 

The proposed rule creates two tiers of exemption:

Tier 1: annual offering limit of $5,000,000, including no more than $1,500,000 on behalf of selling securityholders; and

Tier 2: annual offering limit of $50,000,000, including no more than $15,000,000 on behalf of selling securityholders.

As proposed, some of the more significant Regulation A+ provisions include the following:

• Issuers may raise up to $50,000,000 publicly during a twelve month period;

• Only non-public issuers organized in the U.S. and Canada are eligible to rely on the exemption;
• Securities issued in the offering are not restricted;
• Tier 2 offerings are exempt from state blue sky registration and qualification requirements;
• Issuers may test the waters for potential interest in the offering prior to filing offering documents with the SEC;
• Issuers are required to submit an offering statement with the SEC (initially, at the option of the issuer, confidentially for staff review, followed by an electronic filing via the EDGAR system);
• Tier 2 issuers will be required to electronically file annual reports that include audited financial statements as well as semi-annual and current event reports;
• Issuers subject to certain enforcement (so called “bad boy” provisions) and other regulatory problems may not rely on the exemption;
• Issuers who fail to comply with the ongoing reporting requirements under the proposed rule are not eligible for the exemption;
• Anyone may invest in under the proposed rule, subject to a cap of 10% of the greater of the investor’s annual income and net worth as represented by the investor to the issuer;
• The rule creates a variety of new forms that are synched with the SEC’s EDGAR electronic filing system.
  

The SEC is continuing to solicit comments on such matters as possibly limiting the size of the issuers eligible to rely on the exemption; the status of shell companies and business development companies; whether to allow other non-domestic companies to rely on the exemption; and whether to exclude certain types of securities (such as asset backed securities).  Individual SEC Commissioners also left open the possibility of creating an additional third tier exempting annual raises of between $10-15 million.  The proposals will remain open for public comment for a 60-day period.

The proposed rule requires that offering materials be filed with and qualified by the SEC prior to use.  Such qualification is subject to a review of the offering materials by the SEC, a process similar to the comment process in registered offerings (IPO lite maybe?).  I for one will be curious to see whether the new rule strikes the right balance between such benefits as higher exempt offering limits and state securities law pre-emption on the one hand and the transactional costs associated with ongoing issuer reporting and compliance requirements on the other.  Nevertheless, I believe that if adopted, the new rule has the potential to radically transform the way smaller issuers raise capital.

Bottom line: it remains to be seen whether or not the proposed rule deserves an A+. 

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