On March 25, 2015, the SEC formally adopted its final rule amendments governing the expansion of registration exemptions for public offerings of $50 million or less in any 12-month period under Regulation A of the Securities Act of 1933 (the "Securities Act"), as mandated under Title IV of the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). The SEC’s original proposing release is available here.

As noted in our previous e-Alerts related to the passing of the JOBS Act, the lifting of the ban on general solicitation in Rule 506 offerings, and crowdfunding, the JOBS Act considerably altered the regulations surrounding the capital raising activities of smaller issuers.

Regulation A+ Basics

The SEC's final rule amendments—referred to informally as "Regulation A+"— create two tiers of Regulation A offerings: Tier 1 Offerings, which may be for up to $20 million in any 12-month period; and Tier 2 Offerings, which may be for up to $50 million in any 12-month period. (Previously, Regulation A only provided a registration exemption for offerings of up to $5 million in any twelve-month period.) Both tiers require the filing of an offering statement on Form 1-A, and limit the amount of securities that can be sold by selling securityholders to 10% of the total offering. Additionally, Tier 2 Offerings are subject to the following requirements:

• Audited financial statements must be included in the issuer's offering materials.
• The issuer must file annual and semi-annual reports with the SEC, as well as current reports upon the occurrence of certain significant changes or transactions.
• Though Tier 2 (and Tier 1) Offerings may include non-accredited investors, non-accredited investors in a Tier 2 Offering will be limited to investing no more than 10% of either their net worth or annual income (whichever is greater).

The exemption provided by Regulation A is unavailable for certain issuers, including shell companies, certain investment companies and companies that are already SEC-reporting issuers, certain issuers of asset-backed securities and oil and gas or mineral interests, and issuers that fall under any "bad actor" disqualification rules, have been subject to certain SEC orders, or have failed to comply with certain Regulation A requirements in the past.

State Preemption for Tier 2 Offerings

The most notable change effected by Regulation A+ is that Tier 2 Offerings will be largely exempt from state securities registration requirements. As amended, Rule 256 under Regulation A effectively makes any security sold in a Tier 2 Offering a "covered security" for purposes of Section 18 of the Securities Act, meaning that issuers conducting Tier 2 Offerings will not have to comply with (or seek exemptions from) the securities registration requirements of every state in which they offer and sell (though they will remain subject to anti-fraud provisions of state securities laws and may be required to make certain notice filings or fee payments).

The addition of state law preemption was a major theme of the commentary on the Regulation A+ rule proposal, and with good reason. Securities sold under Rule 506 of Regulation D are already "covered securities" for the purposes of Section 18 of the Securities Act, and the absence of that treatment for Regulation A has made it an unattractive option for most issuers. The amended rules even the playing field somewhat, increasing the likelihood that a Regulation A Tier 2 Offering could be practical for an issuer looking to conduct a multi-state offering.

Potentially a More Flexible Alternative to Crowdfunding

Even as amended, Regulation A will not come close to overtaking Regulation D as a platform for private offerings, as the dollar limits, required offering statement on Form 1-A, and (for Tier 2 Offerings) public reporting requirements will be seen as unnecessary burdens for issuers that can raise capital solely through accredited investors.

But for issuers looking to raise money from non-accredited investors, and who are sophisticated enough to at least have audited financial statements, Regulation A provides a very interesting alternative. The investment community continues to wait for the SEC's final crowdfunding rules, and while several states have unveiled their own crowdfunding statutes, it is clear that Regulation A will provide far more flexibility than state and federal crowdfunding regimes in terms of investment limits at both the issuer and investor level. Issuers comparing the relative disclosure burdens of the two regimes may very well determine that Regulation A—in particular, Tier 2 Offerings—are a better fit for their early-stage capital raising efforts.