Securities Regulation and Corporate Governance

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Securities Regulation and Corporate Governance > Posts > SEC Votes Unanimously to Overhaul and Expand Regulation A; “Regulation A+” to Serve as an Exemption for Offerings up to $50 Million
SEC Votes Unanimously to Overhaul and Expand Regulation A; “Regulation A+” to Serve as an Exemption for Offerings up to $50 Million

The Securities and Exchange Commission (SEC) voted unanimously on March 25, 2015 to expand significantly the ability of certain issuers to raise capital in transactions exempt from the registration requirements of the Securities Act of 1933. This new regime, commonly referred to as “Regulation A+,” is intended to create additional opportunities for companies to raise capital without having to comply with the more burdensome aspects of the traditional registration process. The adopting release, including text of the final rules, is available at https://www.sec.gov/rules/final/2015/33-9741.pdf.

The rules adopted by the SEC, as discussed by the Commissioners and SEC staff at the open Commission meeting, are similar to the rules initially proposed in December 2013, with some modifications. Significant aspects of Regulation A+ as adopted include:

  • Offering limits / Two tier system. Issuers will be able to choose between two “tiers” of offering sizes under Regulation A+. Issuers electing to sell securities under Tier 1 will be limited to raising $20 million within a 12-month period, while those electing to sell under Tier 2 will be limited to $50 million within a 12-month period. 
  • Selling stockholders. Selling stockholders will be permitted in Regulation A+ offerings, and securities sold by selling stockholders will count towards the $20 million Tier 1 and $50 million Tier 2 annual limits. However, in an issuer’s first Regulation A+ offering or any subsequent Regulation A+ offering within twelve months of such first offering, securities sold by selling stockholders, whether or not affiliates, may not in the aggregate constitute more than 30% of the aggregate offering amount with respect to any such offering. In addition, at no time may aggregate sales by affiliates in any 12-month period under Regulation A+ be more than $6 million in the case of Tier 1 offerings or more than $15 million in the case of the Tier 2 offerings.   
  • Ineligible issuers. Regulation A+ will be limited to companies organized in and with their principal place of business in the United States or Canada. Companies that are not eligible to use the Regulation A+ exemption include reporting companies subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), companies that have failed to comply with their Regulation A+ reporting obligations at any time within the past two years, blank check companies, investment companies registered or required to be registered under the Investment Company Act of 1940, business development companies, issuers that are or have been subject to an order denying, suspending, or revoking the registration of a class of securities pursuant to section 12(j) of the Exchange Act entered within the past five years, and issuers subject to “bad actor” disqualification.
  • Preemption of state securities qualification and registration laws for Tier 2 offerings. In an effort to address one of the primary criticisms of the existing Regulation A exemption, Tier 2 offerings will be exempt from the qualification and registration requirements under state blue sky laws. Tier 2 offerings will remain subject to state anti-fraud securities laws, and companies may still be required to file offering materials with state regulators. By contrast, Tier 1 offerings will continue to be subject to state qualification reviews, but issuers are expected to be able to complete this process through a coordinated review program developed by the North American Securities Administrators Association (NASAA). 
  • Robust disclosure for Tier 2 offerings. Tier 2 issuers will be required to submit audited financial statements and file annual, semi-annual, and current reports with the SEC as part of their ongoing disclosure obligations.
  • Listing on national security exchanges. Tier 2 issuers will be permitted to register securities for sale on an exchange using Exchange Act Form 8-A registration, provided that issuers follow the Part I of Form S-1 or (for REITs) the Form S-11 disclosure model in the offering circular. In addition, issuers that register a class of securities under the Exchange Act concurrently with the qualification of a Regulation A offering will become Exchange Act reporting companies upon effectiveness of the Form 8-A. Although the ability to list securities on an exchange in connection with a Regulation A+ offering may increase the chances for a vibrant secondary market to develop following a Regulation A+ offering, the more burdensome disclosure and ongoing reporting requirements making the offering closer to a traditional initial public offering process could be a deterrent to issuers’ adoption of the Regulation A+ regime.
  • Electronic submission of offering statements and ongoing reports. In contrast to the existing Regulation A requirements, Regulation A+ will require issuers to file required offering materials and required reports electronically on EDGAR.
  • Confidential submission of offering statements and “testing the waters.” Issuers engaged in Tier 2 offerings will be allowed to submit draft offering statements for an issuer’s first Regulation A+ offering on a confidential basis to the SEC, provided that a public filing is made at least 21 calendar days before the SEC’s qualification of the offering statement. Unlike emerging growth companies, the timing requirement for filing by issuers seeking qualification under Regulation A+ does not depend on whether or not the issuer conducts a road show or tests the waters in a contemplated offering before qualification. In addition, testing the waters communications will be permitted both before and after the filing of an offering statement relating to offerings under Regulation A+.

While the expansion of the Tier 1 offering size is notable, the Tier 1 exemption option may be less attractive to issuers given the applicability of state blue sky qualification and registration laws and the smaller offering limits as compared to Tier 2 offerings, notwithstanding the more limited disclosure obligations imposed on issuers using Tier 1. The introduction of the Tier 2 offering size, on the other hand, may prove to be attractive to certain issuers, given the ability of companies to raise a not insignificant amount of capital under that pathway. 

Following adoption, the SEC will conduct a biennial study of the offering thresholds, along with an effectiveness review of the impact on capital formation and investor protection within five years of adoption, to determine if any further amendments are desired.

Gibson Dunn will publish shortly a client alert providing further details regarding the Regulation A+ rules adopted by the SEC and describing their potential impact on market participants.

Special thanks go out to Glenn Pollner and Nicolas Dumont (NY) and Sean Sullivan, Daniel Mandel, Nic Dumont and Shailey Jain (SF) for their great work in drafting this blog posting on Regulation A+.

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