Pursuant to JOBS Act, SEC Proposes “Regulation A+” Rules to Facilitate Capital Raising for Smaller Companies

 
Preliminary Client Advisory
December 30, 2013

Earlier this month, the SEC proposed new rules mandated by the JOBS Act to provide for an additional category of offering exempt from registration for certain smaller offerings under the Securities Act. 

This new category of offering is referred to colloquially as “Regulation A+”, and is intended to make Regulation A offerings a more practical method of raising capital for smaller companies (in the past, Regulation A offerings have been disfavored due to filing requirements, applicability of state Blue Sky laws and a low maximum offering amount).

Scope

The SEC’s proposal would expand the Regulation A offering exemption by providing for two tiers of offering:

  1. Tier 1 offerings, which would be very similar to the offerings currently permitted under Regulation A, allowing companies to raise up to $5 million in a 12-month period; and
  2. Tier 2 offerings, which would allow companies to raise up to $50 million dollars in a 12-month period, but would subject them to additional disclosure and reporting requirements.

The SEC’s proposals for offerings under both tiers of Regulation A would preserve, with some modification, Regulation A’s existing provisions concerning issuer eligibility, the contents of offering circulars, testing the waters and “bad actor” disqualifications. The proposed rules would:

  1. Permit companies to submit draft offering documents to the SEC for non-public review before filing;
  2. Allow for the use of “testing the waters” solicitation materials both before and after filing the offering statement; and
  3. Modernize the qualification, communications and offering process in Regulation A to conform more closely to analogous provisions of the Securities Act registration process.

In addition, in Tier 2 offerings companies would be required to include audited financial statements in their offering documents and to file annual, semiannual and current reports with the SEC.  Investors in Tier 2 offerings would be limited to an investment cap equal to the greater of 10% of their annual income or net worth.

Eligibility

Like the current Regulation A, the SEC’s proposed rules would limit the availability of the Regulation A exemption to companies organized and with their principal place of business in the United States or Canada.  In addition, the exemption would be unavailable to companies that:

  1. Are already SEC reporting companies;
  2. Are registered or required to be registered under the Investment Company Act of 1940;
  3. Development stage companies with no specific business plan, or whose plan is to engage in a merger or acquisition with an unidentified company (i.e., “blank check companies”);
  4. Are seeking to offer and sell asset-backed securities or fractional undivided interests in oil, gas or other mineral rights;
  5. Have not filed with the SEC the annual, semi-annual and current reports required by the proposed rules during the two years preceding the filing of a new offering statement (or for any shorter period during which the company was required to file such reports); or
  6. Have been disqualified under the proposed “bad actor” disqualification rules.

Preemption

Tier 1 offerings will still be subject to applicable state securities laws.  However, such laws would be preempted with respect to Tier 2 offerings.

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The SEC is seeking public comment on the proposed rules for a 60-day period following their publication in the Federal Register.

For further information, please see the press release http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540518165 and proposed rules http://www.sec.gov/rules/proposed/2013/33-9497.pdf.

To stay up to date on the changes to the securities regulatory landscape and for further information check out our resources portal dedicated to the JOBS Act (http://www.sandw.com/f-77.html).