SEC Issues Final Regulation A+ Rules
The SEC has adopted amendments to Regulation A and other rules and forms to implement Section 401 of the JOBS Act. Section 401 of the JOBS Act added Section 3(b)(2) to the Securities Act of 1933, which directed the SEC to adopt rules exempting from the registration requirements of the Securities Act offerings of up to $50 million of securities annually. The exemption is commonly referred to as Regulation A+.
The adopting release spans at least 347 pages before you arrive at the text of the rules and the proposed forms. Because of its length and complexity, a high level overview follows.
Regulation A+ establishes two tiers of offerings. Tier 1 has an annual offering limit of $20 million, including no more than $6 million on behalf of selling securityholders that are affiliates of the issuer. Tier 2 has an annual offering limit of $50 million, including no more than $15 million on behalf of selling securityholders that are affiliates of the issuer.
Sales by Selling Securityholders
The regulation limits sales by selling securityholders in an issuer’s initial Regulation A+ offering and any subsequently qualified Regulation A offering within the first 12-month period following the date of qualification of the initial Regulation A offering to no more than 30% of the aggregate offering price.
Regulation A+ limits the amount of securities that an investor who is not an accredited investor under Rule 501(a) of Regulation D can purchase in a Tier 2 offering to no more than:
- 10% of the greater of annual income or net worth (for natural persons)
- 10% of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons).
This limit does not apply to purchases of securities that will be listed on a national securities exchange upon qualification.
Issuers may rely on a representation of compliance with the investment limitation from the investor, unless the issuer knew at the time of sale that any such representation was untrue. Taking a different approach than required by Rule 506(c) which permits general solicitation in public offerings, the SEC stated it is “cognizant of the privacy issues and practical difficulties associated with verifying individual income and net worth” and, therefore, it was not “requiring investors to disclose personal information to issuers in order to verify compliance.” The SEC also noted that requiring issuer verification may result in unintended consequence of dissuading issuers from selling to nonaccredited investors in Tier 2 offerings by increasing compliance uncertainties and obligations.
Under the final rules, offerings pursuant to Regulation A will not be integrated
- prior offers or sales of securities; or
- subsequent offers and sales of securities that are:
- most registered offerings under the Securities Act;
- made pursuant to Rule 701 under the Securities Act which relates to benefit plans;
- made pursuant to an employee benefit plan;
- made pursuant to Regulation S, which are offerings outside of the United States;
- made pursuant to the JOBS Act crowdfunding exemption; or
- made more than six months after completion of the Regulation A+ offering.
Exchange Act Registration
Regulation A+ conditionally exempt securities issued in a Tier 2 offering from the mandatory registration requirements of Section 12(g) of the Exchange Act, for so long as the issuer:
- engages the services of a transfer agent that is registered with the Commission under Section 17A of the Exchange Act;
- remains subject to a Tier 2 reporting obligation;
- is current in its annual and semiannual reporting at fiscal year-end; and
- had 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 either of the thresholds set forth in the last bullet point would be granted a two-year transition period before it would be required to register its class of securities pursuant to Section 12(g), provided it timely files all required ongoing reports during the transition period. Registration would only be required if the issuer exceeded the threshold in Section 12(g) of the Exchange Act ($10 million in assets and held by more than 2,000 persons or 500 persons who are not accredited investors).
Offering statements must be qualified by the SEC before sales may be made pursuant to Regulation A. Regulation A+ permits the offering statements to be declared qualified by a “notice of qualification” issued by the Division of Corporation Finance, pursuant to delegated authority, rather than requiring the Commission itself to issue an order. The notice of qualification is analogous to a notice of effectiveness in registered offerings.
The regulation requires issuers to file offering statements with the SEC electronically on EDGAR. Issuers have the option of non-public submission of offering statements and amendments for review by Commission staff before filing such documents with the Commission, so long as all such documents are publicly filed not later than 21 calendar days before qualification.
Tier 1 and Tier 2 issuers must file balance sheets and related financial statements for the two previous fiscal year ends (or for such shorter time that they have been in existence).
Tier 2 issuers must include financial statements in their offering statements that are audited in accordance with either the auditing standards of the AICPA (i.e., U.S. Generally Accepted Auditing Standards) or the standards of the PCAOB.
Tier 1 and Tier 2 issuers must include financial statements that are dated not more than nine months before the date of non-public submission, filing, or qualification, with the most recent annual or interim balance sheet not older than nine months. If interim financial statements are required, they must cover a period of at least six months.
Part I of the offering statement will require certain basic information about the issuer, certifications as to eligibility to use Regulation A+ (including no bad actor disqualifications), whether it is a Tier 1 or Tier 2 offering, the amount and type of securities offered, anticipated fees, and the names of audit and legal service providers. Part I will be an eXtensible Markup Language (XML) based fillable form. The XML based form will not require the issuer to purchase or maintain additional software or technology.
Part II of the offering statement will be a text file attachment containing the body of the disclosure document and financial statements, formatted in HyperText Markup Language (HTML) or American Standard Code for Information Interchange (ASCII) to be
compatible with the EDGAR filing system. Part II will contain information on risk factors, dilution, the plan of distribution and selling securityholders, use of proceeds, business operations, MD&A type information, identification of directors and executive officers, compensation information, ownership information, related party transactions and the like.
Part III of the offering statement will be text attachments, containing the signatures, exhibits index, and the exhibits to the offering statement, formatted in HTML or ASCII. As adopted, issuers will be required to file the following exhibits with the offering statement: underwriting agreement; charter and by-laws; instrument defining the rights of securityholders; subscription agreement; voting trust agreement; material contracts; plan of acquisition, reorganization, arrangement, liquidation, or succession; escrow agreements; consents; opinion regarding legality; “testing the waters” materials; appointment of agent for service of process; and any additional exhibits the issuer may wish to file.
The rules provide for scaled disclosure for Tier 1 issuers in certain circumstances, particularly in the compensation area. MD&A type disclosures are not scaled between Tier 1 and 2 issuers, but are not as extensive as required by Item 303 of Regulation S-K.
Tier 1 issuers must provide information about sales in such offerings and to update certain issuer information by electronically filing a Form 1-Z exit report with the SEC not later than 30 calendar days after termination or completion of an offering.
Tier 2 issuers must file electronically with the Commission on EDGAR annual and semiannual reports, as well as current event reports. Tier 2 issuers must also file electronically a special financial report to cover financial periods between the most recent period included in a qualified offering statement and the issuer’s first required periodic report.
Relationship to State Securities Laws
The final rules provide for the preemption of state securities law registration and qualification in Tier 2 offerings because all sales are made to “qualified purchasers.” A qualified purchaser is defined to be any person to whom securities are offered or sold in a Tier 2 offering.
The final definition of “qualified purchaser” does not include offerees in Tier 1 offerings. The final rules permit Regulation A issuers to test the waters and make offers in the pre-qualification
period at the federal level, but the states retain oversight over how these offerings are conducted at the state level.
States also retain authority to:
- investigate and bring enforcement actions with respect to fraudulent transactions;
- require the filing of any documents filed with the SEC “solely for notice purposes and the assessment of any fee;” and
- enforce filing and fee requirements by suspending offerings within a given state.
ABOUT STINSON LEONARD STREET
Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.
The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.
Contact Steve Quinlivan for more information.