On March 25, 2015, the U.S. Securities and Exchange Commission unanimously adopted final rules to amend Regulation A, as mandated by Title IV of the Jumpstart Our Business Startups Act (JOBS Act). Whereas the existing Regulation A provided an exemption from Section 5 registration requirements for certain smaller securities offerings by private companies, the new rules create an exemption that is substantially similar to the existing Regulation A framework, while at the same time expand the size of offerings and provide for the preemption of state blue sky laws in certain offerings. Below is a brief summary of certain key takeaways from the new rules. The final rules can be found here.
Two-Tier System
The new exemption, commonly referred to as “Regulation A+,” establishes two distinct tiers of offerings. Tier 1 sets 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 establishes an annual offering limit of $50 million, including no more than $15 million on behalf of selling securityholders that are affiliates of the issuer. In general, sales by selling securityholders are limited to no more than 30 percent of a particular offering in the issuer’s initial Regulation A offering and subsequent Regulation A offerings within the first 12-month period following the initial offering.
Tier 2 offerings are also subject to additional requirements, including: (1) a requirement to provide audited financial statements; (2) a requirement to file annual, semiannual and current event reports; and (3) a limitation on the amount of securities that may be purchased by nonaccredited investors (see “Investment Limitations” below).
Both Tier 1 and Tier 2 exemptions will be available to issuers organized, and having their principal place of business, in either the United States or Canada. The new Regulation A exemption is not available to: (1) SEC reporting companies; (2) blank check companies; (3) certain investment companies; and (4) companies seeking to offer asset-backed securities or fractional undivided interests in oil, gas or other mineral rights.
The new Regulation A is also unavailable to: (1) issuers that have not filed ongoing reports required by Regulation A during the preceding two years; (2) issuers that have been subject to any SEC orders under Exchange Act Section 12(j) that was entered within the past five years; and (3) certain bad actors.
New Regulation A imposes an investment limitation for Tier 2 offerings. The investment limit is not applicable to accredited investors and will not apply if, at the consummation of the offering, the securities are to be listed on a national securities exchange.
Otherwise, nonaccredited investors must limit their investments to no more than (1) 10 percent of the greater of either the investor’s annual income and net worth (in the case of a natural person) or (2) 10 percent of the greater of such investor’s annual revenues and net assets at fiscal year-end (in the case of a nonnatural person).
One of the highlytouted features of “Regulation A+” will be the preemption of registration and qualification requirements under state blue sky securities laws that are applicable for Tier 2 offerings. Tier 1 offerings are still required to comply with state securities law requirements, but Tier 2 offerings will not be subject to state review so long as the securities are sold to “qualified purchasers” or if such securities are listed on a national securities exchange.
However, in connection with any Tier 2 offering, state securities regulators will continue to have authority to require the filing of offering materials and to bring enforcement actions for fraudulent conduct.
Sellers of securities under the new rules will still have potential Section 12(a)(2) liability for offers or sales made by means of oral communications or for an offering circular that includes material misleading statements or omissions. Offerings will also still be subject to the antifraud provisions under federal securities laws, regardless of the fact that an exempt offering under Regulation A is excluded from coverage of Section 11 of the Securities Act.
