SEC expands the Regulation A exemption
FINANCIAL REPORTING INSIGHTS |
When a company offers or sells securities to potential investors to raise capital, the company is required under the Securities Act of 1933 to register the offer and sale, unless it can rely on an exemption. To increase access to capital for smaller companies, Section 401 of the Jumpstart Our Business Startup Act directed the SEC to adopt rules exempting from the registration requirements offerings of up to $50 million of securities within a 12-month period. The SEC chose to build upon Regulation A, which exempted from registration offerings of up to $5 million within a 12-month period, and recently issued Amendments to Regulation A.
The SEC’s amendments update and expand the Regulation A exemption by creating the following two tiers of Regulation A offerings:
- Tier 1, which consists of securities offerings of up to $20 million in a 12-month period, including no more than $6 million on behalf of selling security-holders that are affiliates of the issuer
- Tier 2, which consists of securities offerings of up to $50 million in a 12-month period, including no more than $15 million on behalf of selling security-holders that are affiliates of the issuer
For offerings of $20 million or less, the company could elect to proceed under either Tier 1 or Tier 2. Under Tier 1 and Tier 2, companies are subject to basic requirements, including ones addressing issuer eligibility, disclosure and other matters drawn from the current provisions of Regulation A. In addition to these basic requirements, companies conducting Tier 2 offerings are subject to the following requirements, among others:
- An individual investor who is not an accredited investor under Rule 501(a) of Regulation D is limited to purchasing no more than 10 percent of the greater of the investor’s annual income or net worth
- The financial statements included in the offering circular are required to be audited in accordance with either U.S. generally accepted auditing standards or the standards of the Public Company Accounting Oversight Board
- The company is required to provide annual audited financial statements and other information on an ongoing basis using a new Form 1-K. Semiannual reporting and current event updates similar to a Form 8-K also are required.
The amendments also update Regulation A to, among other things, permit companies to submit draft offering statements for nonpublic SEC review prior to filing and permit the use of “testing the waters” solicitation materials both before and after filing the offering statement.
The exemption is limited to companies organized in and with their principal place of business in the United States or Canada. The exemption is not available to companies that:
- Are already SEC reporting companies and certain investment companies
- Have no specific business plan or purpose or have indicated their business plan is to engage in a merger or acquisition with an unidentified company
- Are seeking to offer and sell asset-backed securities or fractional undivided interests in oil, gas or other mineral rights
- Have been subject to any order of the SEC under Exchange Act Section 12(j) entered within the past five years or have not filed ongoing reports required by the rules during the preceding two years
- Are disqualified under the “bad actor” disqualification rules