SEC Publishes CDIs On Rules 147, 503, 504 and Reg A
The Securities and Exchange Commission’s Division of Corporate Finance (Corp Fin) recently published its interpretation of various rules under the Securities Act with new Compliance and Disclosure Interpretations (CDIs). The CDIs reflect updates for the amendments to Rule 147, as well as Rules 503 and 504 of Regulation D. There were also a few CDIs related to Regulation A.
In addition, some older CDIs were withdrawn in light of the repeal of Rule 505, and there were some non-substantive changes to Rule 147 and Regulation D (e.g., changes to correct outdated rule and statutory references). Below is a summary of the substantive changes.
Rule 147 — Intrastate offers and sales
When a family trust that is not deemed to be a separate legal entity has two trustees, and only one resides in a state where a Rule 147 offering is being made, the issuer may offer and sell securities to the trust in the Rule 147 offering as long as one of the trustees reside in the state of the offering.
Rules 503 and 503T– Filing of Notice of Sales
A Rule 506 offering will not lose “covered security” status if the issuer fails to file a Form D with the SEC. The types of securities that fall within the definition of a “covered security” under Section 18 are those with respect to transactions exempt from registration pursuant to rules or regulations issued under Section 4 (a)(2) of the Securities Act, including Rule 506(b). Also, Congress determined in the JOBS Act that Rule 506(c) would be treated as a regulation issued under Section 4(a)(2). Therefore, filing a Form D is not a condition that must be met to qualify for the Rule 506 exemption.
Rule 504 - Exemption for Limited Offerings and Sales of Securities Not Exceeding $5 million
Offerings under Rule 504 may be public or non-public depending on the provision of the rule that is relied upon. Private funds excluded from the definition of “investment company” by Section 3(c)(1) or 3(c)(7) of the Investment Company Act may rely on Rule 504 to make an exempt non-public offering. However, if a private fund makes a “public offering” of its securities, that fund can no longer rely on the exclusions under Section 3(c)(1) or (7) and would be required to be registered as an “investment company” under the Investment Company Act, unless another exclusion is available. As an investment company, the fund would be precluded from using the Rule 504 exemption.
The instruction to paragraph (b)(2) of Rule 504 contains an example of the calculation of the aggregate offering price. This was provided to demonstrate the operation of the limitation on the aggregate offering price, but does not contemplate integration of the offerings described.
Rule 504 is not available to an issuer that is subject to “bad actor” disqualification under Rule 506(d) on or after January 20, 2017. As such, issuers must determine if they are subject to bad actor disqualification any time they are offering or selling securities in reliance on Rule 504. See Rule 504(b)(3), Rule 506(d) and additional CDIs interpreting Rule 506(d).
CDIs in connection with Regulation A
When a Regulation A issuer registers a class of its securities pursuant to the Securities Exchange Act of 1934 on a Form 8-A concurrently (i.e., within 5 days after) with the qualification of Form 1-A (or a post-qualification amendment to the Form 1-A), the financial statements in the Form 1-A or the post-qualification amendment must be current. As the SEC stated in the Regulation A adopting release, the purpose of this timing limitation was to help ensure that the disclosures in the Form 1-A, including financial statements, are generally current at the time of the effectiveness of the Exchange Act registration.
When an issuer registers a class of securities pursuant to the Exchange Act on a Form 8-A concurrently with the qualification of a Form 1-A, and the Form 1-A did not contain financial statements for the last full fiscal year, the staff would allow the issuer to file its first Form 10-K for the preceding fiscal year within 90 calendar days after effectiveness of the Form 8-A. The CDI used the following example: “The staff would not object if a calendar year-end issuer that qualifies a Form 1-A on March 30, 2018 and registers a class of securities pursuant to the Exchange Act on April 4, 2018 files its first annual report on Form 10-K within 90 calendar days after effectiveness of the Form 8-A.”
Rule 13a-13 requires the issuer to file a quarterly report on Form 10-Q for the first fiscal quarter following the most recent annual or interim period for which financial statements were included in the registration statement. The report must be filed by the required due date of the Form 10-Q or, if later, within 45 days of the effective date of the registration statement. If a Regulation A issuer registers on Form 8-A concurrently with the qualification of a Form 1-A, and the qualified Form 1-A did not contain financial statements for one or more quarterly periods (after the most recent annual or semiannual period for which financial statements were included in the Form 1-A) that were completed prior to the effectiveness of the Form 8-A, the staff will allow the issuer to file a Form 10-Q for the completed quarterly period, or two Forms 10-Q if financial statements for more than one quarterly period were not included, within 45 days of the effectiveness of the Form 8-A. The CDI used the following example: “A calendar year-end issuer registers a class of securities pursuant to the Exchange Act on August 10, 2018, concurrent with the qualification of a Form 1-A that includes financial statements for the fiscal year ended December 31, 2017, but no financial statements for the two most recently completed quarterly periods in 2018. The staff would not object if that issuer files its Forms 10-Q for the first and second fiscal quarters of 2018 on or before September 24, 2018. Unlike the Regulation A issuer, a calendar year-end issuer that registers a class of securities pursuant to the Exchange Act on August 10, 2018, concurrent with the effectiveness of a Form S-1, would have been required to include financial statements for the first fiscal quarter of 2018 in its registration statement and would be required to file its Form 10-Q for its second fiscal quarter on or before September 24, 2018.”