The SEC issued a 388-page final rule release, entitled Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets. (The clunky wording seems like it was done to accommodate a catchy acronym, but “FCFAEIOBIATCIPM” doesn’t really flow.) The release details rule changes in a variety of areas relating to private offerings, but I will focus for this post on the expansion of the crowdfunding (Regulation CF) and Regulation A offering exemptions, and cover other topics in future posts. Here are the SEC’s press release and fact sheet about all the new rule changes.
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On September 5, 2017, the U.S. House of Representatives overwhelmingly approved a bill that would allow already-public reporting companies to use the provisions of so-called Regulation A+ to make securities offerings. Regulation A+ in its current form is, in essence, a mini-IPO, allowing private companies to raise up to $50 million, offerings that are too small to attract the interest of large investment banks who underwrite traditional registered IPOs. If the current bill is enacted, public companies could take advantage of this process, which involves somewhat less disclosure than required for a full Form S-1 registration statement.
The new Regulation A+ offerings, which are available for use starting on June 19, 2015, should not be thought of in the same category as Regulation D offerings. If a company’s primary goal is to raise as much money as possible with as little offering-related and ongoing securities compliance as possible, you still can’t beat Regulation D. Rather, Regulation A+ offerings will be useful to smaller companies who want some of the advantages of going public, without having to rely on imperfect solutions like reverse mergers or self-filing registrations.
Unlike small companies that go public through means like a reverse merger, companies relying on Regulation A+ are not subject to the high ongoing disclosure burdens of public companies. Tier 2 offerings under Regulation A+ (up to $50 million) impose limited ongoing disclosure requirements as compared to the burdens imposed on traditional public companies, and Tier 1 offerings (up to $20 million) don’t impose any ongoing requirements at all after initial clearance with the SEC and state blue sky regulators (the latter of which is preempted for Tier 2 offerings). Many small companies that go public via reverse mergers find it difficult to keep up with the compliance costs of being a public company; companies using Regulation A+ will not have the same issue.
Unlike Regulation D offerings, Regulation A+ permits a limited amount of securities to be sold by existing stockholders – up to $6 million in Tier 1 offerings, and up to $15 million in Tier 2 offerings. As a result, the company’s early investors and founders have an opportunity to cash out and realize a profit on their investment of money or time. Additionally, the shares purchased in a Regulation A+ offering are unrestricted, meaning there’s a potential for a secondary market to emerge in the company’s shares. In most cases, there won’t be high trading volume comparable to large public companies, but this is already the case with small companies that go public via a reverse merger or otherwise.
Another factor that could cause a company to opt for a Regulation A+ offering is when the target investor base has several non-accredited investors. Under Regulation D, a Rule 506(b) offering permits no more than 35 non-accredited investors, and a Rule 506(c) offering (i.e., generally solicited) permits zero non-accredited investors. In contrast, non-accredited investors can freely participate in Regulation A+ offerings, though in the case of Tier 2 offerings, an investor can invest no more than 10% of the investor’s annual income or net worth, whichever is greater.
The SEC recently adopted final rules implementing significant changes to securities offerings done under Regulation A. Because of the greatly expanded scope of the offerings, they are referred to colloquially as Regulation A+ offerings. The SEC announced the final rules with a press release and fact sheet.
Continuing its implementation of rules mandated by the JOBS Act, the SEC has proposed rules for the expansion of offerings under Regulation A. Here is the SEC’s handy press release and fact sheet. Commentators have dubbed the new rules “Regulation A+” because of the greatly increased maximum offering amount under the new rules (and not as a reference to the average grade at Harvard). As with the recent crowdfunding proposal, these rules are not effective until after the SEC issues final rules following a comment period. [Read more…]