The SEC Broadens the Crowdfunding and Regulation A Exemptions

December 19, 2021 / 2 minutes of reading / By

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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A Possible Expansion of Regulation A+

December 21, 2021 / 2 minutes of reading / By

Regulation A+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.

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Regulation A+ – An Improved Way for Smaller Companies to Go Public

May 1, 2015 / 2 minutes of reading / By

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.

Regulation A+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.

Regulation A+ Proposed Rules

December 19, 2013 / 2 minutes of reading / By

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. …

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Simultaneous Regulation CF and Rule 506(c) Offerings

December 21, 2021 / 2 minutes of reading / By

Simultaneous Regulation CF and Rule 506(c) OfferingsBack when the equity crowdfunding rules were proposed following passage of the JOBS Act, the $1 million offering limit per year for what are now known as Regulation CF offerings was viewed as making this procedure impractical. The amount raised would not be sufficient in light of the legal, accounting and other costs needed to prepare for the offering. However, as crowdfunding is now a reality and companies are giving it a shot, a fix to the dollar limit has evolved: raise funds not just under Regulation CF, but under other exemptions that are not subject to that dollar limit.

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Under-Regulation of Stock Transfer Agents

January 9, 2015 / 2 minutes of reading / By

If you have a small private company with 10 shareholders, the job of issuing share certificates to them, and cancelling and issuing new ones when there are transfers, is a pretty non-time consuming task that can be handled by one of the founders. If you are Microsoft Corporation, where over 30 million shares change hands every day on average, needless to say, a person seated in front of a stock ledger book couldn’t keep up with the flow. Accordingly, for public companies, a back-office infrastructure has developed, with stock transfer agents serving the function of keeping track of record ownership of shares for these companies.

Stock Transfer Agents | Regulation Stock Transfer AgentsAs described in this Q&A from Luis A. Aguilar, one of the Commissioners of the SEC, an important function of transfer agents is to distinguish between restricted shares – ones that were recently sold in an exempt transaction under the Securities Act of 1933 or were issued to company affiliates – and unrestricted, free-trading shares. In my practice, I typically deal with the larger and more established transfer agents, which employ full-time compliance professionals to ensure that restricted shares are policed properly. For example, if a shareholder of a client of mine asks the transfer agent to remove the restrictive legend because the shares have been held over a year and the holder isn’t an affiliate, the compliance department of the transfer agent will want to see an opinion of counsel from my firm, to the effect that the legend can be removed under Rule 144.

Unfortunately, as described by Commissioner Aguilar, some transfer agents are not as scrupulous about adhering to these rules. Under current (non-)regulation, the same individuals can operate a transfer agent, a brokerage firm and a microcap public company. In such a scenario, if those individuals want to initiate a scheme involving the sale of unregistered shares, the transfer agent (being the same people) won’t police the transactions to prevent them from happening. This is just one of many examples cited by Commissioner Aguilar making clear that a more aggressive regulatory approach is needed.

Regulation FD

May 29, 2014 / 2 minutes of reading / By

SEC Paternalism on equity crowdfunding rulesSteven M. Davidoff, the New York Times DealBook’s Deal Professor, has a good outline of the various unforeseen consequences of Regulation FD that have unfolded since its adoption by the SEC in 2000.  Reg FD was intended to combat the practice by public companies of providing material information selectively to favored contacts, such as investment bank analysts, which provided a trading edge to the clients of the banks over small investors who didn’t have access to such information.  Much like the laws against insider trading, which some argue is a victimless crime, Reg FD is intended to create a level playing field for all investors, because if the general sense among the public is that the equity markets are rigged against the little guy, the small investors will stay away from investing and thereby lose out on its long term gains.

Davidoff’s litany of problems with Reg FD, including decreased analyst coverage of public companies and the difficulties in controlling what is said on social media, are real and need to be addressed.  He ultimately questions whether we even need the rule and speaks of the old days, where information was filtered through the analysts, with nostalgia.  However, in so many other areas of life, the advent of improved communications technology has served to eliminate middlemen, saving costs for everyone.  Are we really advocating, in an era of unprecedented amounts of available information about public companies, that investors need to pay a third party for their expertise, or otherwise not participate?

I would argue that the basic concept behind Reg FD – that companies need to avoid selective disclosure to preserve a general sense among investors that they have equal access to information – is worth preserving.  The goal of the SEC should be to adapt and tailor its rule for the new realities.  For example, instead of using the Netflix CEO’s Facebook post as a teachable moment showing that Reg FD applies to social media posts (as described in the Davidoff piece), instead acknowledge that it’s tough for companies to monitor this kind of thing and apply a more lenient standard to insider social media posts than the harsh disclose-immediately-or-else standard applied to company statements.  Under a more relaxed standard, there would be a violation only if the social media posts were part of a coordinated effort to evade Reg FD, not an innocent bit of bragging as appeared to be the case with Netflix.

The Latest from the SEC on Private Offering Regulation

April 29, 2014 / 2 minutes of reading / By

Keith F. Higgins, the Director of the Division of Corporation Finance at the SEC, recently spoke at the 2014 Angel Capital Association Summit.  His speech came in the midst of much JOBS Act rulemaking that I’ve blogged about frequently, and his remarks provide some useful insight into what the SEC is thinking about these days, although he includes the standard disclaimer that he’s speaking for himself and not the whole agency.  In particular, I thought the following topics that he covered were worthy of note: …

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The London Stock Exchange’s Proposal for Private Company Trading

November 17, 2022 / 2 minutes of reading / By

The Wall Street Journal reported exclusively on plans by the London Stock Exchange to create a special market for the shares of private companies for limited public trading. The plan itself is not yet public, so the Journal was only able to report on limited aspects of what is contemplated. In the same way that U.S. private companies have increasingly been able to access public-like markets with new exemptions like Regulation CF, Rule 506(c) and Regulation A+ and the development of secondary trading markets for large private companies, this is an effort across the pond to provide some of the benefits of public market access to small and fast-growing companies.

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