Reporting companies that seek to raise capital will soon be able to rely on the Regulation A offering exemption, as a result of amendments recently adopted by the Securities and Exchange Commission (SEC). The expansion of Regulation A is intended to give reporting companies greater flexibility in raising capital by reducing the cost and time associated with the registration requirements. However, we expect that the advantages of using Regulation A in place of a registered offering or other offering exemption will be most compelling to early-stage public companies that are not yet eligible to use a short-form registration statement on Form S-3.
Regulation A provides an exemption from registration under the Securities Act of 1933 (Securities Act) for the offer and sale of up to $50 million of securities in any 12-month period, subject to compliance with certain requirements that vary depending on the total amount of securities sold in that term. There are two overlapping tiers of offerings under Regulation A. Tier 1 includes offerings of up to $20 million; and Tier 2 covers capital raises of up to $50 million – which present different benefits and burdens, as we explained in further detail here.
Removing limitations on Regulation A
Prior to the amendments, companies subject to the reporting requirements of the Securities Exchange Act of 1934 (Exchange Act) were not eligible to use Regulation A. In response to a mandate contained in the Economic Growth, Regulatory Relief, and Consumer Protection Act enacted in May 2018, the SEC has removed that limitation. The amendments also address the independent duty to file periodic reports in Tier 2 Regulation A offerings; and declare that companies that are current in their Exchange Act reporting will have satisfied their Tier 2 reporting obligations. In addition, conforming changes are being made to Form 1-A, the offering statement that must be filed with the SEC in connection with securities offerings made pursuant to Regulation A, to reflect the amended issuer eligibility criteria.
Costs and benefits of Regulation A
Reporting companies interested in raising capital within the statutory offering limits should analyze the costs and benefits of a Regulation A offering. For example, the expanded use of Regulation A gives more reporting companies the latitude to solicit indications of interest from the prospective investor base (i.e., to engage in “testing the waters” communications). In addition, securities offered pursuant to Regulation A may be offered to unaccredited investors and are not subject to the resale limitations of the Securities Act. However, the Form 1-A offering statement is subject to SEC review and comment, and must be qualified, which is similar to receiving a declaration of effectiveness for a registration statement. Furthermore, the fact that Regulation A does not permit at-the-market offerings may be a drawback for some issuers. After assessing the known paths provided by the registration requirements and other offering exemptions, such as Regulation D, most established reporting companies are not likely to see substantial regulatory relief in using Regulation A.
The SEC adopted the amendments to Regulation A on December 19, 2018. These amendments will become effective immediately upon publication in the Federal Register.
