In March 2015, the Securities and Exchange Commission (SEC) adopted amendments to Regulation A, which expanded the Regulation A exemption from the Securities Act of 1933 (the Securities Act) registration for public offerings up to $50 million in any 12-month period (also known as Regulation A+ or Reg A+), as mandated by Title IV of the Jumpstart Our Business Startups Act. The Reg A+ offering limit was raised by the SEC to $75 million in any 12-month period in November 2020. Offerings under Reg A+ are also subject to reduced disclosure requirements and less onerous ongoing reporting requirements as compared to the full Securities Exchange Act of 1934 (the Exchange Act) requirements. Reg A+ was adopted to facilitate capital raising by smaller companies while still providing investor protection. In the SEC’s Report to Congress on Regulation A / Regulation D Performance, dated August 2020, the SEC noted that from June 19, 2015, through December 31, 2019, the SEC qualified 382 Regulation A offerings seeking to raise approximately $9.1 billion.
Although Reg A+ was adopted to facilitate capital raising, the SEC’s staff (the Staff) has been reminding Reg A+ issuers through enforcement proceedings and comment letters that they still must comply with SEC rules and regulations for these offerings. The SEC’s Division of Enforcement (Enforcement Division) has recently settled a number of proceedings with Reg A+ issuers, and the SEC’s Division of Corporation Finance (Corporation Finance) has issued comment letters to existing Reg A+ issuers on various topics. This Alert provides details on the areas of focus in the Enforcement Division’s proceedings and Corporation Finance’s comment letters.
Enforcement Proceedings
On May 16, 2023, the Enforcement Division settled enforcement proceedings with ten Reg A+ issuers with alleged offering infractions spanning several years. The fines ranged from $5,000 to $90,000, and the issuers were ordered to cease and desist from committing or causing any violations and any future violations of Section 5 of the Securities Act. The Enforcement Division proceedings pertaining to Reg A+ offerings fell into the following five categories:
- Increased Offering Size — increasing the number of securities being sold without filing new offering statements (Form 1-As) or post-qualification amendments (PQAs) to obtain qualification for the modified offerings
- Change in Offering Price — revising the offering price by more than 20% without filing new Form 1-As or PQAs to obtain qualification for the modified offerings
- At-the-Market Offering — conducting an at-the-market offering
- Delayed Offering — conducting a delayed offering
- Annual Updating — failure to update financial statements at least annually through a PQA
Increasing the Number of Securities Being Sold
Seven out of the ten Enforcement Division proceedings pertained to Reg A+ issuers increasing the number of securities being sold without filing a new Form 1-A or PQA to obtain qualification for the modified offerings. In each case, the issuer attempted to increase the amount of securities being offered in connection with an ongoing Reg A+ offering by filing an offering circular supplement. Under the SEC’s rules, to offer additional securities, a Reg A+ issuer must add those securities by filing a new Form 1-A or PQA, which the SEC must then qualify.
Revising the Offering Price
Six out of the ten Enforcement Division proceedings pertained to Reg A+ issuers revising the offering price by more than 20% without filing new Form 1-As or PQAs to obtain qualification for the modified offerings.
The SEC noted in its orders that an issuer is not permitted to use an offering circular supplement to fundamentally change the information set forth in an offering statement. Instead, such changes require a new Form 1-A or PQAs, each of which must be qualified by the SEC. A fundamental change may be present when an issuer changes the price of securities offered under Reg A+. Although not explicitly noted in the Enforcement Division orders, the SEC has historically held that a change in offering price greater than 20% would be considered a fundamental change.
Conducting an At-the-Market Offering
Two out of the ten Enforcement Division proceedings pertained to Reg A+ issuers conducting an at-the-market offering.
An issuer is not permitted to conduct an at-the-market offering under Reg A+. An at-the-market offering is defined in Reg A+ as an “offering of equity securities into an existing trading market for outstanding shares of the same class at other than a fixed price.” The issuers failed to comply with Reg A+ by changing the price of the offering multiple times.
Conducting a Delayed Offering
One out of the ten Enforcement Division proceedings pertained to a Reg A+ issuer conducting a delayed offering. A delayed offering is an offering that does not commence within two calendar days and is not permitted under Reg A+.
Failure to Update Financial Statements
Three out of the ten Enforcement Division proceedings pertained to Reg A+ issuers failing to update financial statements at least annually through a PQA. To conduct an ongoing Reg A+ offering, an issuer is required to file a PQA at least every 12 months after the qualification date to include the financial statements that would be required by Form 1-A.
Staff Comment Letters
In addition to the Enforcement Division proceedings noted above, Corporation Finance has also been focusing on Reg A+ issuers. We reviewed all comment letters issued to existing Reg A+ issuers (i.e., not in connection with qualification of their initial offering) in the last 12 months. These comments letters were in connection with the Staff’s review of PQAs and Form 1-As filed other than in connection with initial offerings.
We found that the Staff sought additional disclosure or explanation concerning:
- At-the-Market and Delayed Offerings — whether an offering is being made at a fixed price or is a delayed offering
- Marketing Materials — compliance of disclosure posted on issuer websites, on social media accounts, and in advertisements
- Updating for New Financials — updates to qualified Form 1-As related to interim or annual financial statements and auditor consents
- Series Offering Disclosure — for issuers that are series LLCs, disclosure related to open and closed series offerings
Fixed Price and Delayed Offerings
Similar to the Enforcement Division proceedings noted above, a number of comments focused on whether Reg A+ issuers were conducting delayed offerings or offerings at other than a fixed price. As noted above, delayed offerings and at-the-market offerings are not permitted under Reg A+. One issuer argued that the offering was not an at-the-market offering because there was no existing trading market for the issuer’s securities. It is unclear if the Staff accepted this argument or one of the other arguments made by the issuer that the offering was not an at-the-market offering. We agree that an offering should not be considered an at-the-market offering if there is no “existing trading market.”
Compliance of Disclosure Posted on Issuer Websites, in Social Media Postings and in Advertisements
In a number of instances, the Staff indicated that they reviewed issuer websites, social media postings, and advertisements in connection with the Staff’s review of issuer filings. In connection with that review, the Staff had the following comments:
- Whether an issuer’s online advertising complied with Rule 251(d) or Rule 255(b) of Reg A+.1 The Staff also asked that all testing-the-water materials, including any advertisements posted on third-party websites and an issuer’s Twitter account, be filed with the SEC and for the issuer to explain how it complied with Rule 255(b) of Reg A+.
- Whether certain information posted on an issuer’s Twitter account should have also been posted on a Form 1-U.
- The Staff requested that the issuer make a number of corrections and updates to information posted on the issuer’s website.
Updates to Qualified Form 1-As Related to Interim or Annual Financial Statements and Auditor Consent
In a number of instances, the Staff asked Reg A+ issuers to update their financial statements with the most recent interim or annual financial information. For example, in one instance, the Staff asked an issuer (that is registered under the Exchange Act) to update its Form 1-A to include the interim financial statements and related information from its Form 10-Q. In a number of instances, the Staff also asked issuers to file updated auditor consents with their PQAs. It should be noted that under Rule 252(f), an auditor consent needs to be filed with a PQA only if the previously filed audited financial statements have been amended.
Disclosure Related to Open and Closed Series Offerings
In a few instances, the Staff was focused on disclosure pertaining to the offering of different series for issuers that are series LLCs. In one instance, the Staff noted that the offering table on the cover page of the offering circular should include only ongoing series offerings and not closed offerings. In another instance, the Staff noted that an issuer should update its master series table to include open and closed offerings, not just open offerings.
Next Steps
Given the noted enforcement proceedings and comment letters, existing Reg A+ issuers should keep in mind that although Reg A+ was meant to be less onerous than seeking registration, they still must comply with the SEC’s rules and regulations for these offerings, and they should consider how these enforcement actions and comment letters may impact their offerings and disclosures going forward.
The authors wish to acknowledge Martin Green for his assistance with this Alert.
[1] Rule 251(d) states that offers may be made after an offering statement has been qualified, but any written offers must be accompanied with or preceded by the most recent offering circular filed with the SEC for such offering. Rule 255(d) pertains to the solicitation of interests and other communications before the qualification of an offering statement.
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