On March 25, 2015, the Securities and Exchange Commission adopted final rules amending its Regulation A, i.e., the so-called “Regulation A+ Rules”. Regulation A has been a little used provision in the securities laws due to, among other shortcomings, the limit on offering size to $5 million in any 12-month period and the requirement that these offerings be cleared not just by the SEC but any state in which an issuer was planning to offer and sell the securities. From 2012 to 2014, there were only 26 Regulation A offerings. Instead, private companies have relied heavily on Rule 506 of Regulation D, which offers no cap on the amount that can be raised and federal preemption of state securities laws.

These amendments to Regulation A were clearly designed to address these and other perceived problems with existing Regulation A.  The amendments create two new types of “small IPO” for emerging growth companies looking to enter the public markets that are much more “user friendly”. Some of the highlights of the amendments are:

  • Two tiers of Regulation A offerings:
    • Tier 1 with anannual offering limit of $20 million, of which no more than $6 million can be sales by affiliates of the issuer.
      • Balance sheets and related financial statements for the two previous fiscal year ends (or for such shorter time that they have been in existence) must be included in the offering statement.
      • Registration and qualification under state securities law is still required. Issuers may use the multi-state coordinated review program for Regulation A offerings established by NASAA.
    • Tier 2 with annual offering limit of $50 million, of which no more than $15 million can be sales by affiliates of the issuer. Unless the securities will be listed on a national securities exchange upon qualification, the amount of securities that an investor who is not an accredited investor can purchase will be limited to the lesser of: (a) 10% of the greater of annual income or net worth (for natural persons); or (b) 10% of the greater of annual revenue or net assets at fiscal year end (for non-natural persons).
      • In addition to the financial statements required for Tier 1 offerings, Tier 2 issuers must include audited financial statements.
      • Annual, semiannual and current event reporting is required.
      • State securities law registration and qualification requirements are preempted.
  • For both Tier 1 and Tier 2 offerings, sales by selling securityholders are limited to 30% of the aggregate offering price in an issuer’s initial Regulation A offering and any of its other Regulation A offerings within the following 12 months
  • Regulation A cannot be used:
    • by issuers subject to a deregistration order of the Commission during the previous five year;
    • by issuers that have not filed the reports required by Regulation A within the previous two years;
    • by “bad actors”; and
    • to register asset-backed securities.
  • Issuers relying on Regulation A will be permitted to “test the waters” either before or after the filing of the offering statement.
  • Issuers will also be permitted to submit offering statements and amendments non-publicly for review by Commission staff before filing such documents with the Commission.

The Commission was clearly trying to address some of the most obvious reasons why issuers have not chosen to rely on Regulation A with the establishment of a Tier 2 offering that allows issuers to raise up to $50 million dollars without the burden of state securities qualification.  Time will tell whether the Commission’s improvements to Regulation A will actually increase utilization of this capital raising alternative.